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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 9, 2004
FTI CONSULTING, INC.
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(Exact Name of Registrant as Specified in Charter)
Maryland 001-14875 52-1261113
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(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
900 Bestgate Road, Suite 1000, Annapolis, Maryland 21401
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 224-8770
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ITEM 9. REGULATION FD DISCLOSURE.
Information furnished pursuant to Item 9.
On February 9, 2004, the Company held a conference call to discuss
revised guidance included in our Press Release of the same date, filed as
Exhibit 99.1 to our Form 8-K filed on February 9, 2004. A copy of the transcript
of the call is attached as Exhibit 99.1 to this Current Report on Form 8-K.
The information included in this Item 9, including the Exhibit attached
hereto, shall be deemed not to be "filed" for purposes of Section 18 of the
Securities Act of 1934 and shall not be incorporated by reference into any
filing pursuant to the Securities Act of 1933, regardless of any incorporation
by reference language in any such filing.
(c) Exhibits.
Exhibit No. Description
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99.1 Transcript from conference call of FTI
Consulting, Inc., held on February 9, 2004
1
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, FTI has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FTI CONSULTING, INC.
Dated: February 10, 2004 By: /S/ THEODORE I. PINCUS
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Theodore I. Pincus
Executive Vice President and
Chief Financial Officer
2
EXHIBIT INDEX
Exhibit No. Description
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99.1 Transcript from conference call of FTI
Consulting, Inc., held on February 9, 2004
EXHIBIT 99.1
FTI CONSULTING, #570247
February 9, 2004, 11:00 a.m. ET
Financial Relations Board
Moderator: Lisa Fortuna
Operator Good morning, ladies and gentlemen, and welcome to the FTI
Consulting 2004 Outlook conference call. At this time all
participants are in a listen-only mode. Following today's
presentation instructions will be given for the question
and answer session. If anyone needs assistance at any time
during the conference, please press the star followed by
the zero. As a reminder, this conference is being recorded
today, Monday, February 9, 2004.
I would now like to turn the conference over to Lisa
Fortuna. Please go ahead.
L. Fortuna Good morning, everyone, and thank you for joining us to
discuss this morning's news release.
Before we begin, I want to remind everyone that the
conference call may contain forward-looking statements
that involve uncertainties and risks. There can be no
assurance that actual results will not differ from the
company's expectations. The company has experienced
fluctuating revenues, operating income and cash flow in
some prior periods and expects this may occur from
time-to-time in the future. As a result of these possible
fluctuations, the company's actual results may differ from
our projections. Other factors that could cause such
differences include pace and timing of additional
acquisitions, the company's ability to realize cost
savings and efficiencies, competitive and general economic
conditions, retention of staff and clients and other risks
described in the company's filings with the Securities and
Exchange Commission.
I'll now turn the call over to Jack Dunn, Chairman and CEO
of FTI Consulting.
J. Dunn Thank you very much. I'd like to thank everybody for
joining us this morning. I'm sorry for the delay in
holding this conference call since our initial
announcement. It was important however that we use the
intervening time to quantify and more importantly mitigate
the impact of the departures that were discussed in that
press release.
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FTI CONSULTING Page 1
It was important that we develop and present our roadmap
for addressing this situation. In preparing our plan and
our guidance presented, we have involved all of our senior
people. It is important that you know that they are
supportive and enthusiastic, significantly rising to the
occasion because at FTI we are dedicated to an integrated
approach moving forward among all our groups. They are
enthusiastic about our prospects and about their ability
to accomplish the job ahead. Stu will address some of the
specific aspects of our plans and Ted will then address
our continuing financial strength and provide some
additional metrics about our financial statements and our
operating statistics going forward. Stu.
S. Kahn Thank you, Jack. Basically as it relates to the
restructuring practice, our program is to get back out to
all the clients that had been served by this departing
group and explain to them why we are the number 1 practice
area and the number 1 choice for continuing to serve them,
perhaps not on the existing assignments where it might be
too disruptive to change from the present staffing,
however, our goal is to be certain that we have a good
shot at picking up future assignments from in particular
bank clients and law firms.
One of the means that we're going to use to emphasize our
strength in this area is the emphasis on industry experts.
We have within our existing and remaining restructuring
group recognized healthcare experts, telecom experts,
energy and power experts, retail, real estate and
manufacturing logistics and supply chain people who can
help in restructurings of troubled companies.
In addition, with our hire of Greg Rayburn to lead our
interim management practice, we believe we're going to be
able to certainly reconstitute that from what it was in
its fledgling state as part of the prior practice.
We're confident, as Jack indicated, that the people
involved in the restructuring business within our
organization are ready for this task, ready for this
challenge and will rise up and recover some good portion
of the work that we originally said we might be losing and
that we now reflect a lesser amount of loss. In addition,
one of the other things we're doing is changing some of
the incentive compensation structures to more directly
incentivize these folks on a go-forward basis to achieve
success.
With that, let me turn it over to Ted for a few comments
and then we'll open it up for questions.
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FTI CONSULTING Page 2
T. Pincus Right, some additional information about our guidance for
2004. We are still in the process of developing our
guidance which we will give you in a bit more detail next
week in terms of headcount, utilization, average rate. We
intend to give you a little more information about our
major practice areas as well in doing that. So we're not
quite ready for that. But just a few pieces of additional
information.
The range expected of our EBITDA which as you know is a
non-GAAP measure and is reconciled to net income by
exactly what it says, interest, taxes, depreciation and
amortization. We expect that to range from approximately
$104 million to $115 million for 2004.
We expect our cash flow from operations, not free cash
flow, cash flow from operations which you can see in our
cash flow statement, to range between $70 and $80 million
for 2004. A very minor change in our estimated tax rate
due to the changes in our geography due mostly to state
taxes from 40.5% to our new estimate is 40.9% for 2004.
In addition at the moment our total debt is approximately
$121 million. We have a $100 million unused credit line as
well. Our EBITDA margin, as I said, is a little lower than
anticipated in our earlier guidance. It's expected to be
approximately 25% because as you can tell from some of
this information, the group that has departed did have a
higher margin than many of our other practice areas.
That's all I can add at this point. Let me pass it back to
Jack.
J. Dunn Thank you, Ted. Most importantly we'd like to now open it
up for your questions please.
Operator Thank you, sir. Ladies and gentlemen, at this time we'll
begin the question and answer session. If you have a
question, please press the star followed by the one on
your pushbutton phone. If you would like to decline from
the polling process, press the star followed by the two.
If you are using speaker equipment, you will need to lift
the handset before pressing the numbers. One moment please
for our first question.
Our first question comes Josh Rosen with Credit Suisse
First Boston. Please go ahead.
C. Kaneshiro Good morning, it's Clayton Kaneshiro filling in for Josh.
Could you just clarify a little bit on the charge you
expect in the fourth quarter
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FTI CONSULTING Page 3
that you talked about in the press release, provide a
little more detail there. And then should we expect
another charge in the first quarter associated with some
of the departures from P&M?
T. Pincus Let me take that. No, the charge in the fourth quarter was
in connection with optimizing the size of our
restructuring practice. Interestingly enough it was not
among the group that departed but as you know, we had
given original guidance in which there was a decline in
the expected size of our restructuring practice from 2003
to 2004 and that was a charge in connection with bringing
resources in line with that original guidance.
With respect to the first quarter, there's still a little
dust that has to settle out. I think Jack and Stu will
probably elaborate for you a little bit more as to the
size of the practice that is expected to have totally
departed us.
Whether or not we would be in a position where we would
have some resources remaining that we would not be able to
envision utilizing is yet to be determined but if so, we
do not expect it to be significant and certainly not at
the level that we talked about in the fourth quarter.
C. Kaneshiro Thank you. Also just one follow up on the plan for 2004.
You mentioned going to customers and talking about your
value proposition and industry expertise, but also as you
deal with the loss of some of these people from P&M can
you talk on the other side from a cost savings
perspective, are there things you can do to lower your
SG&A or other cost savings to minimize the profitability
impact?
T. Pincus Let me cover just a bit of that. We don't operate with
very high SG&A in the first place, as you do know. The
estimate for guidance that we put out already incorporates
the inherent savings in SG&A. Interestingly enough those
of you who know us well, know that the bulk of this effect
was in our northern New Jersey office and interestingly
enough we have had considerable staffing pressure in our
New York office and we had expansion in New York included
in our original guidance in terms of space and this
probably presents us with an opportunity to realign some
geographic resources.
So the answer to your question is whatever cost savings
this affords us were already built into the guidance.
C. Kaneshiro Thanks, Ted.
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FTI CONSULTING Page 4
Operator Our next question comes from David Gold with Sidoti &
Company. Please go ahead.
D. Gold Hi, good morning. Can we just talk for a second. I guess
by my calculation if we have 85% of the senior managing
directors locked up, I guess that's about 18 that aren't,
somewhere thereabout.
T. Pincus I'll give you an exactly number, it's 17, David.
D. Gold 17. Can you tell us where those people lay, what divisions
they're in and if there's any concentration of business
tied to them?
T. Pincus There is no particular concentration. They're across our
practice areas other than in restructuring for the clear
reason that everybody that joined us in our restructuring
practice is either among the departed or included among
the BRS group that has joined us including some promotions
that have taken place there and everybody in that group
came in with contracts. So they are throughout our
litigation technology, out trial support practices, our
economic practices, our forensic practices. It's quite
scattered.
D. Gold Okay. And lastly the thoughts these days at this level on
the buyback that you have authorized.
J. Dunn As you know in October we authorized a buyback of $50
million worth of our stock over the ensuing 12 months.
Through the fourth quarter we had repurchased
approximately $4 million worth of our stock. That will be
announced in our upcoming results. I think under the new
rules you announce that and this is an FD disclosure
through this source as well. We believe as Ted indicated
that we have sufficient resources to continue that plan.
Our particular plan follows our own internal rules about
when we have an opened window period so that we would not
be in the marketplace before our earnings announcement
which would be February 18th. And then we have a cooling
off period after that. So we're not in the marketplace
right now.
We don't intend to announce on a day-by-day,
period-by-period when we're in or when we're out. We plan
to abide by the rules, reporting it in the 10-Q following
the appropriate quarter to keep everybody on a level
playing field.
D. Gold That's fair but on the $4 million, Jack, can you give us a
sense or maybe an average ... basically what price did you
buy in it?
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FTI CONSULTING Page 5
T. Pincus It was at approximately $20, David, so it's approximately
200,000 shares that were purchased back.
D. Gold Gotcha. Thanks a lot, that's helpful.
T. Pincus Thank you.
Operator Our next question comes from Bill Warmington with Suntrust
Robinson Humphrey. Please go ahead.
B. Warmington Good morning, everyone.
Management Good morning, Bill.
B. Warmington I wanted to ask a question on how many total people were
leaving in addition to the 13 senior managing directors.
T. Pincus It is approximately and again the dust has to settle a
little bit, but it will be between 60 and 70 people in
total.
B. Warmington Okay, but of those 60 to 70, that includes the 13?
T. Pincus That's correct.
B. Warmington How many of those are ... is that 60 to 70 billable or is
the billable portion smaller than that?
T. Pincus No, that's the billable portion.
B. Warmington If we're looking at the senior ... I'm trying to do a
count here. We started out before the 13 announced their
departure, how many senior managing directors did we have?
T. Pincus About 125.
B. Warmington Okay, so we're deducting 13 from that. And then of that
number there are 17 of that number who are ...
T. Pincus That is correct. 17 of 112.
B. Warmington Alright. Of the remaining ones who are under
contract, could you talk a little bit about the contracts
that those people are under?
T. Pincus The typical contracts for those people under contract when
issued is typically either 4 or 5 years and then there are
non-competition periods that extend beyond those contracts
that have ranged from 6
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FTI CONSULTING Page 6
months to 2 years. So pretty obviously at any point ...
plus when people are often promoted, they are given
contracts. As we sit here today the average remaining life
of the contracts range from as low as 2 to 2.5 years
through 6 years, almost 6 years.
B. Warmington To change gears on you, what is the cap ex that you're
expecting for '04?
T. Pincus It was approximately $10 to $12 million. And I don't
expect that number to change as a result of this
particular situation.
B. Warmington Stu had mentioned in his remarks a revision of the
compensation system to provide some new incentives. I
wanted to ask about potential impact on margins of that
and also any elevated legal expenses associated with
what's going on.
S. Kahn I'm sorry, I just had a technical difficulty. Potential
impacts on margins and what else, Bill?
B. Warmington For 2 items. You had mentioned in your comments a change
in the compensation system and just a concern about
whether there were going to be elevated legal expenses and
how that was going to impact margins.
S. Kahn I don't expect that the elevated legal expenses would be
so great as to have enough of a measurable impact on
income and I expect that we don't have anything projected
in our numbers for the fourth quarter for 2004 that would
reflect a recovery as a result of those legal expenses. I
think that would probably be a wash.
As to the new incentives, at worst a wash if not a pick
up. As to the new incentive program we expect that this
new incentive program will be offset dollar for dollar by
additional revenues and additional income. So
theoretically one could argue that there'd be some impact
on the margin percentage but not actually on the margin
dollars.
B. Warmington Now on the special termination expense not related to the
departure of the 13 that was taken in the fourth quarter,
how many people did you reduce the practice by at that
point?
S. Kahn In the quarter itself there were some people that cost us
a good deal of money and some people that didn't cost us a
lot of money. But I actually don't have at my fingertips
the numbers, Ted, but I would say it was probably ... I
think there were probably 6 SMDs who in
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FTI CONSULTING Page 7
total moved out of that practice and probably another 40
people in the quarter.
B. Warmington Roughly it sounds like about 46 people in total.
S. Kahn I'm sorry, I just don't have it.
T. Pincus The bulk of the charge of course is related to the SMDs.
B. Warmington But those 46 people were coming out of the restructuring
group as well but not the Policano & Manzo piece it sounds
like.
S. Kahn I think for the most part not, no.
B. Warmington If you could talk a little bit about the actual client ...
how many client relationships are we talking about that
are potentially at risk in this?
S. Kahn Our view of it is we work for all the same clients as that
group did in other parts of the company and it is our
objective that we're going to go back out to make sure
that the folks who are currently working with that other
group will be working with us in the future. We don't
expect at the end of the day to have to forego any
specific client relationships whatsoever. And with Mike
Policano and Bob Manzo's help, we expect that we'll be
able to restore those relationships.
B. Warmington How does the runoff of the revenue work when you have
people change like that? The people who've left are
continuing to bill but are those billings going to be
taking place under FTI or they have left and all future
billings are under their new firm?
S. Kahn I think it varies. It'll depend upon whether the client
has asked to have the case transferred or not. But no
matter how you do it, the cutoff between when they were
employees of FTI and when they're no long employees of FTI
is complicated and does require some cooperation between
both parties to make sure the clients are properly served.
B. Warmington But it sounds like you're going to start to see the impact
of that starting in the first quarter.
S. Kahn In terms of decreased revenues from those jobs?
B. Warmington Right.
S. Kahn Yes, sir.
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FTI CONSULTING Page 8
B. Warmington Okay just being clear. Thank you very much.
S. Kahn You're welcome.
Operator Our next question comes from Charles Ruff with Insight
Investment. Please go ahead.
C. Ruff Hello. Can you talk a little bit more about the action
plans which you mentioned in today's press release, the
new hires marketing litigation? I'm not sure exactly how
those are going to mitigate what's happened.
S. Kahn Do you want me to take that one?
J. Dunn Sure.
S. Kahn In the marketing plans for instance, it means going back
out to all these clients and trying to get them to use us
on a go-forward basis and convincing them of what it is
that we can bring to the table.
In new hires we expect that in the interim management
business we will need some new hires in that area as we
build that business up. We're also building up other
businesses like for instance we're developing a tax
consultation practice as part of our restructuring
business and a transaction support practice as part of our
restructuring business and we'll be hiring people into
those practices in order to offset some of the impact of
this.
I think primarily those were the things to which we were
referring.
J. Dunn To add a little bit to that if I might. We're talk about
particular individuals among the money center banks, etc.,
who have a preference for using different folks, different
client relationships. Because of the nature of what they
do, because of the nature of conflicts, etc., nobody has
one go-to source, they have many. There are many of those
people out there who would certainly ... we're putting
together a list of who's out there, who the clients like.
As you know, we have been very active in the new hire area
and would continue to be when it makes sense. We're also
going through our roster of existing people who are some
of the best in the world to see who matches up with the
particular clients and the particular needs that they
might have.
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FTI CONSULTING Page 9
I think Stu mentioning Greg Rayburn is a great example of
somebody who's come in who was a senior personage in the
interim management area who has the ability not just to
have 2 or 3 cases but the ability to draw people to him to
build a real practice.
Finally on the litigation front, I think it's probably
something we don't want to say a lot about now, not to be
coy but we're looking at all the options of what has gone
on. And with the clients in mind, we'll do everything in
our power to make it seamless for the clients but within
the bounds of that we want to make sure that we protect
the rights of FTI and the shareholders.
C. Ruff Can you talk about in the expected 2004 revenues, can you
break that down by line of business, litigation versus
restructuring versus economics?
T. Pincus These are some of the pieces of information that we do
intend to supply with next week's call.
J. Dunn It's actually the week after I think.
T. Pincus Is it the week after? The 19th.
C. Ruff Can you talk about the number of shares you're assuming
and the earnings per share guidance?
T. Pincus At this point we are assuming 42,700,000 shares. That
number is clearly prior to, if there is, any more
substantial buybacks.
C. Ruff Right. And can you talk more about what changed from the
initial announcement when the absolute worst case was
going to be 21% reduction in EBITDA versus today?
T. Pincus Certainly. 21% of EBITDA would have translated into much
more as a percent of the bottom line than the new guidance
that we've given you. Clearly interest expense,
depreciation and amortization were not going to be
affected by that number.
So the math would have shown something like a 24 or 25%
reduction in expected income. This new guidance is
approximately 18 to 19% reduction in net income.
C. Ruff Okay but what happened on the EBITDA line today versus
that initial announcement? Why is it worse? Why is the
expectation today worse than the absolute worst case that
was presented.
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FTI CONSULTING Page 10
T. Pincus It isn't worse.
C. Ruff I'm sorry, I thought the initial guidance was for $140
million.
T. Pincus That's correct.
C. Ruff In EBITDA and the worst case would have been a $29 million
reduction which would put it down to $111.
T. Pincus Excuse me, you're comparing the upper end of the EBITDA
guidance to the lower end today.
C. Ruff Okay so the 140 was on the upper end of the previous
guidance?
T. Pincus That is correct.
C. Ruff Okay, that was my mistake. What was the previous guidance
then in EBITDA?
T. Pincus The previous guidance was 130 to 140.
C. Ruff Okay that was my mistake. I apologize. Okay thank you.
T. Pincus Thank you.
Operator Our next question comes from Marta Nichols with Banc of
America Securities. Please go ahead.
M. Nichols Good morning. Thanks. Jack, I just wanted to talk a little
bit qualitatively about what happened here. You made some
allusions to going forward with an integrated approach
which you guys have outlined a number of times and I want
to drill down on that.
If you read between the lines of these recent developments
just at the MDs within what was the P&M process were
somehow uncomfortable with the purchase of the BRS
business. I'm wondering if you can just give us some color
on whether there was some miscommunication that occurred
in setting expectations with those MDs that ultimately
departed or what was their major objection in moving
forward with FTI as an integrated approach to bankruptcy
and restructuring.
J. Dunn I think it was a combination of things as I guess it
usually is. The people who were Legacy folks with us from
P&M wanted to retain a discrete compensation system and a
discrete policy with respect to
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FTI CONSULTING Page 11
conflicts. We're not as we go-forward about setting up
fiefdoms or discrete areas. What we're looking for is
compensation systems and corporate governance and looking
at conflicts in a way that is for the greater good, that
inspires someone who's in the forensic accounting area to
want to bring in business on the restructuring side and
vice versa, to want to incentivize and motivate people on
the economic consulting side to get business for the
entire company.
Interestingly we're in the very short strokes in terms of
having a major presence in the economic consulting and in
the forensic accounting side, both of which in effect
doubled over the last 90-120 days.
It became apparent we believe, management believes that we
have a much bigger bang for our buck in creating that kind
of atmosphere where the cooperation is a much more
essential core value of ours and to start that off with a
carve out of the company in an industry in which we are
the leading purveyor of that service just didn't make
sense to us from a long term goal.
M. Nichols Okay, maybe asked a slightly different way, do you feel
having now gone through the departure of the former
executives, are there any inherent conflicts that you see
going forward in being on essentially both sides of the
restructuring business? I think we talked a lot about this
when you bought BRS but the idea that you are consulting
both with companies and with the money center banks or the
creditors, is there a concern that you can't really exist
comfortably on both sides of that business?
J. Dunn Absolutely not. Interestingly both the P&M Legacy practice
and the BRS Legacy practice had both debtor and creditor
assignments represented the large banks and represented
debtors as well as other constituencies such as
bondholders, etc.
I think P&M probably was weighted towards the creditor
side and the BRS folks were weighted towards the debtor
side. What was a conflict here was a compensation system
that rewarded competition, in our view, rewarded
competition among our constituent groups rather than
cooperation.
We tried to put forth a regime that would make that
revenue neutral to people, but at the end of the day they
decided they would rather go their own way.
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FTI CONSULTING Page 12
M. Nichols Okay and then maybe just a final and I apologize if these
are tough qualitative questions.
J. Dunn No, they're fine, but one thing you've got to recognize is
that in the genre of bankruptcy restructuring, corporate
finance restructuring, the banks have an integral part to
play in not only who represents them but often in who
represents the company and in many cases that don't even
get to be a Chapter 11 or an event like that. The banks
are in there recommending to the company they bring
somebody in.
We have a tremendous number of cases like that and we have
a tremendous cachet through the BRS people with all the
big money center banks. There are certain individuals that
prefer an individual that has now left FTI and we're going
to do our darndest to convince them that either somebody
we have existing or somebody we can get can meet all their
needs. So that's our action plan.
M. Nichols Then maybe a simplistic question about those folks that
departed. I mean P&M has been a part of FTI for I guess 4
years now. Why hadn't they been under contract before now,
particularly given how important it was as a piece of your
business? Was it a matter of you not asking them to sign
contracts, was it a matter of a long time stalling in
terms of getting the contracts signed? Was there some
reason why or some failure in terms of the management that
they had not been asked to sign contracts previously?
J. Dunn Everyone will have their own view of whether it was
management failure. Suffice it to say from our perspective
one of the initiatives that we began last year was to
migrate our existing Legacy folks into a situation where
they had contracts. We were and are in the process of that
initiative.
Again with not going into too much detail because it may
bear on future actions, etc., we were in negotiations with
almost I believe all of our managing directors who were
not under contract about arranging a contractual situation
and had in good faith entrusted folks who had been team
players with us with additional responsibilities. So we
thought we were on a way to having a contractual situation
resolved.
M. Nichols Okay and then maybe outside of these practices, can you
give us some idea of the impact that you've either seen or
that you anticipate this loss of business having on the
rest of your business, on your other practices either
directly in terms of client relationships or just on
morale for example because people see that the senior
level
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FTI CONSULTING Page 13
management is distracted by this or that the stock price
has down or whatever.
What have you seen and what do you anticipate in terms of
impact elsewhere?
J. Dunn What I've seen is a rallying to FTI which has been a darn
good employer and partner with folks who have been with us
for a long time. As we mentioned in the press release,
there are many constituencies in all these matters and
somebody, I can't remember who in the questioning said is
there a problem with being on 2 sides of the case. You
betcha, so that we have multiple entrance points into
these matters.
I think that people are taking the view that we have
something very good going here at FTI. We have a hiccough
and of course maybe more than that. I don't mean to be
cavalier about it, more than that. But in terms of a place
where there's a tremendous amount of opportunity and in
fact a chance to eliminate some squabbling over turf, I
think we have a tremendous opportunity to make that up.
That's the number one reaction that I'm getting from this.
M. Nichols That's great. Thank you very much.
Operator Our next question comes from Raj Sharma with Merriman
Curhan Ford. Please go ahead.
R. Sharma Hi, guys. Just wanted to clarify how many consultants were
there in the P&M practice and how many have left? Other
than Policano and Manzo how many senior managing directors
and how many other consultants were there and how many of
those have left?
T. Pincus There were 13 other than Policano and Manzo and they have
gone. The number of staff is still moving.
S. Kahn There were 14.
T. Pincus I'm sorry, Stu, absolutely right.
R. Sharma So 14 plus a sum number of consultants that were there?
T. Pincus The total billable headcount was about 70.
R. Sharma I know that they contributed about $30 million of EBITDA
for '04. Has there been any change? Have you taken, in
your new EBITDA
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projections have you taken all of that out or there's
still some number that still contributes to that EBITDA
from this practice?
T. Pincus The guidance took into account all the plans that you
heard of today. It is conservative guidance in our view
because there is much about that plan that could
ameliorate further the effect, but that we can't count on
it yet.
R. Sharma And one other question. How would you characterize the
integration of Lexicon and KPMG's DAS Group so far? Is it
on plan? Is it as well as you'd expected?
S. Kahn I'll do that one. The KPMG DAS Group has integrated
beautifully within our existing forensic accounting
practice. In fact we've created a leadership group that
includes the former head of the KPMG practice who is now
the leader of the entire forensic group with 2 of the
former leaders from the FTI Legacy practices leading
individual major regions and major parts of the practice.
In addition, the Ten Eyck group which was a small
acquisition that we made back in the tailend of October or
early November has fit in beautifully with the rest of our
practices and that integration's going along extremely
well.
The Lexecon Group is of course a group of economists so
they're not fungible and interchangeable with the
accountants generally who work in the restructuring or
accounting group. Their integration efforts are mostly in
the area of cross-selling or joint selling along with the
FTI forensic practice and the trial practice and the
restructuring practices in cases where either their skills
might be helpful to our getting work in other practice
areas or conversely where relationships or contacts or
client situations might warrant bringing in economic
consulting help and thereby bringing in those folks.
That's been growing pretty much according to plan.
R. Sharma Great, thank you.
S. Kahn You're welcome.
Operator Our next question comes from David Kelly with RS
Investments. Please go ahead.
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FTI CONSULTING Page 15
D. Kelley Good morning. In terms of trying to get the senior folks
contracted, what are the range of incentives that you'll
be using, ranging from potential EBITDA payouts to stock?
And will this potentially affect the senior folks that are
locked up? Will you have to go back to them and
renegotiate with them? Thank you.
S. Kahn I can try to answer that question. It's a little
difficult. We don't expect a significant effort in going
back to our existing people and renegotiating that
contract. We think we're paying our folks pretty well and
we certainly are at or above market in most cases and we
intend to be there on a go-forward basis.
In terms of signing up other folks into existing
contracts, we've been using things like stock options and
restricted stock to induce them or give them consideration
for their contracts and that's been received pretty
favorably.
I don't know that we have on the table any new incentive
programs. We have incentive programs in place in all of
our practice areas to reward people for excellent
performance and I'm not sure that we expect that we would
have any more, put any more in place.
D. Kelley An unrelated follow-up if I might ask. The cap ex that's
associated with the cash flow is what?
T. Pincus Approximately $10 to $12 million. And that was not
associated with the cash flow from operations number that
I gave. Cash flow from operations of $70 to $80 million is
before cap ex of course.
D. Kelley Thank you.
Operator Our next question comes from Dan Dittler with Lehman
Brother. Please go ahead.
D. Dittler Thank you. Just to be clear, Jack and Ted. In the past
you've been very clear about this but just for the sake of
repeating, your 2004 guidance does not include any
additional acquisitions nor does it include any further
repurchases. Is that correct?
T. Pincus That's correct.
D. Dittler With regards to your operating cash flow guidance, does
that include the incremental working capital required for
the KPMG acquisition?
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FTI CONSULTING Page 16
T. Pincus The answer is to the extent that that had to spill over
into 2004 it does.
D. Dittler Great. And then one further question with respect to your
2004 guidance and that is in your $1.27 to $1.47 range,
does that include any client retention with respect to
clients that were associated with the departing senior
managing directors?
T. Pincus Very, very modest in terms of specific engagement
retention. But it does include estimations of client
retentions subsequent to some of the particular
engagements that are moving with some of the departing
people.
D. Dittler Okay so in other words with respect to the engagements,
the existing engagements that these managing directors
were working with, you assumed that the revenue associated
with that will go away but that you'll retain the clients
perhaps for future engagements?
T. Pincus Right, not all. Not 100%. Clearly not 100%. But as we
said, one objective was not to disrupt client service.
D. Dittler Okay great. And then with respect to your senior level MD
rehiring plans, how many are you contemplating to rehire
to replace the 13 lost managing directors?
J. Dunn That's part of the process to go find out what the clients
want. We have meetings scheduled with the clients to go
find out what their view is of the folks that we have and
to find out frankly who's on their short list to go to and
that's the way we do that. We also obviously haven't
informed you because we've been competing against
individuals in the rest of the world for the last 15 or 20
years in terms of Dom DiNapoli and Bob Manzo, etc. so we
know who's out there. So we just want to get a feel for
that before we go out so it's not a specific number, it's
more appropriately rebuilding that kind of special
practice.
D. Dittler Then one final question with respect to potential first
quarter charges. Just to be clear, the 13 managing
directors resigned and since they resigned accordingly
there will be no severance charges. Is that a fair
assumption?
J. Dunn That is entirely fair.
D. Dittler Great. Thank you very much.
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FTI CONSULTING Page 17
Operator Our next question comes from Steve Kohl with Matador
Capital. Please go ahead.
S. Kohl Good morning, guys. A couple of quick questions. I want to
get back to some of the incentive stuff a little bit. You
talked about restrictor stock and stock options. Let me
expand on that. First of all when you look at bonus
structure, what percent do you envision of that being
stock versus cash or what element is cash and how do you
expect that to change going forward? And of that stock
that is restricted, over what period does it typically
vest?
T. Pincus I'll take portions of that. The stock is typically vesting
over the life of the contracts so that if our typical
contract ranges from 4 to 6 years, so will the life of the
restricted stock. We of course will have a proxy statement
out later in the year which may or may not contain
requests from our shareholders to approve changes in those
programs. We're still working on that. What was the other
part of the question?
S. Kohl It was just in terms of understanding the cash versus
stock argument. We've seen that on some of the other
consulting companies where they've had issues where
consultants ... if you have somebody that's compensated on
their own practice area and the firm doesn't do as well,
you end up paying a heck of a lot of cash out to them as
part of their practice but the company may not do quite as
well. You saw that for example with the headhunting firms.
That was a model you guys have probably seen with Korn
Ferry and Hydric where they ended up paying out $60 or $70
million in bonuses when the firm doesn't make any money.
I guess I'm just trying to make sure that the model that
you guys are envisioning using is not analogous to that.
T. Pincus It's a variable model which is the more that the business
earns, the more that people will earn and vice versa as
well.
S. Kohl Is it their individual business? Let me rephrase it. How
much of the bonus is contingent on their individual
practice area versus a corporation's targets and goals?
T. Pincus Most of the bonuses are dependent on the 4 major practice
areas. Some go deeper than that but in general they are
dependent on the major practice areas. Several of our
bonuses are dependent, however, on overall company
profits.
J. Dunn Can I embellish that a little bit?
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FTI CONSULTING Page 18
S. Kohl Of course, please.
J. Dunn We've tried to have a situation that gives people some
control over their own destiny with regard to bonuses. We
also have tried for right or wrong to focus first on cash
compensation so that the option of equity compensation is
something that's additional, that nobody has to go home to
their spouse and say we're not going to make what I
thought this year because I took it all in options. We
believe for these folks who are high powered,
exceptionally professional and skilled folks that that's
the way to go. So we start with that.
I don't think perhaps, I'm not sure, but I don't think
that in measuring us against the staffing companies or the
head hunting firms or others that you'll find that it's as
a large a component.
Much of the equity compensation; i.e., either outstanding
stock or options is held by people within conjunction with
acquisitions that we've done. I think we would stay true
to that so you'll see it reflected.
What we have, where we are migrating for example, however,
is rather than the compensation be related to a specific
office or a specific person's practice, we're looking at
it more over the entire ... giving all the FMDs, for
example, in the restructuring practice a piece of the
restructuring pie. We think it's a big enough pie that the
impact between those practices and the overall company is
more direct. So it's not one particular office in
Saskatchewan did great so it's going to take all the
profits from the company. They're bound together to
cooperate with each other to make it work.
S. Kohl One last question just a clarification point. As part of
the BRS purchase in '02, can you give me a little bit
better clarity? I was reading through the documents. It
looks like you gave 1.2 million shares back to the
managing directors at that point and 1.8 million to other
folks. I wasn't clear. I know there's some price
protection which I didn't completely make out at the 28
and change level. Could you maybe explain how that works
for me?
J. Dunn That was not giving shares. We paid part of the purchase
price in stock which went to Pricewaterhouse and since the
folks who joined us were partners of the firm, they
received some of that stock so that's where the stock came
from. It was not in addition to or over the purchase
price, it was just part of the basket of consideration
that Pricewaterhouse received.
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FTI CONSULTING Page 19
We did agree to give them price protection and Ted you can
describe that.
T. Pincus That was a pre-split number you were using. The price
protection is at approximately the $19 level and it's on
only a portion of the stock.
S. Kohl It's only 40% or something, is that right?
T. Pincus It's 40 of 40.
S. Kohl So it's a relatively small number.
T. Pincus And it would also be accounted for as additional purchase
price. Our estimation right now at present levels is $1 to
$1.5 million at most as additional purchase price
retrospectively.
S. Kohl Last question just with your other consulting agreements,
do you have anything like this that I missed that we have
to be concerned with the stock price coming down or is
that pretty much it in terms of price protection that
you'd offered and certain agreements?
T. Pincus Of our recent 3 acquisitions, only a very small piece of 1
of the 3 was in stock. The major acquisitions were for
cash.
S. Kohl Very good. Thank you very much, guys.
Operator Our next question comes from Arnold Ursaner with CJS
Securities. Please go ahead.
A. Ursaner Good morning. A couple of questions. One is on the
Policano & Manzo contract that you discussed today. I
guess my first question is why are you negotiating such a
short period of time with them.
J. Dunn That was not a negotiated period. They were folks that we
had under contract. We were just describing what was.
A. Ursaner So that's just the remainder of their contract?
J. Dunn Actually it was a re-up. Their contracts actually expired
...
T. Pincus February 1st.
J. Dunn February 1st but we had negotiated with them an additional
extension before that.
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FTI CONSULTING Page 20
A. Ursaner But again, going to the point where your other contracts
are 4 years or so, why would you negotiate such a short
time?
J. Dunn At the point we negotiated those contracts that looked
like what our ... that was our need combined with their
desire. I think as the year unfolds they'll be deciding
whether they want to continue with us or whatever. I think
as the press release indicated, our activities in Europe
seem to be going at least according to plan if not better.
Bob obviously has a different role than we anticipated at
the beginning of the year. I think the point was looking
ahead we did this a while back and now we will be in
conversations with them I'm sure this year as to what
their plans are going to be for the future.
A. Ursaner Maybe I missed it but have you told us where these people
are going and did you have a realistic opportunity to try
to keep them?
J. Dunn I believe the bulk of them are starting their own firm. A
realistic ... we had a potential economic ability to do
it, we had a potential ... we certainly had discussions
but we did not in my opinion have a realistic opportunity
of what it would have cost us in our desire to make the
most out of our remaining company in terms of a fully
integrated company.
A. Ursaner A question for Ted on the EBITDA guidance of 104 to 115,
can you give us a feel for the balance or mix between that
let's say by product area on a go-forward basis?
T. Pincus Not yet, Arnie. Those are some of the things that we hope
to discuss with a little more detail on the 19th.
A. Ursaner Okay to the extent you do that on the 19th, would you also
include the things that we might like to see, where your
billable employees are today and what your goals would be
let's say for year end headcount again to the extent you
want to do that by segment or product area?
T. Pincus We don't at present operate as segments, Arnie, the rigid
segments that are described in accounting literature.
We're exploring that, by the way.
To the extent that we don't change the way that we
operate, we'll try to give you some more clarity in terms
of headcount, average rates and billable employees by
major practice areas, recognizing that if
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FTI CONSULTING Page 21
we don't operate as segments, there's a lot of fungibility
of our resources.
A. Ursaner Again, maybe it's better served in your earnings call but
another question that certainly is in the back of my mind
is to the extent you're giving us your revenue guidance
for the year, what percent of that would be, if you will,
kind of business in hand? And again, you've been asked
this many times, kind of a runoff of business and the
trend of pricing on new business that's replacing it.
T. Pincus You're a little bit ahead of the curve on this one, Arnie.
Those are the kinds of questions we'd love to entertain on
the 19th.
A. Ursaner As I say, to the extent you can answer those on the 19th,
I think it would be very helpful. Thanks.
Operator Our final question comes from Jonathan Shafter with Kramer
Stallman. Please go ahead.
J. Shafter Hey, guys. I guess what I'm trying to figure out here is
over 2004 just a rough cut of it. Two-thirds of your
business I think will come from non-financial
restructuring lines. And if you could go through the major
segments and just kind of explain where the crossover
would occur between client relationships. I mean my
hypothesis would be that say on the litigation side, even
if some of the departing, the P&M guys had a client that
you're also working for the same company on the litigation
side, the litigation trial technology you're probably
working with the general counsel on that company, there
wouldn't be actual client crossover.
What is the extent outside of the business restructuring
area client relationships actually intertwine? Did I make
myself clear? I'm not sure if I said that well.
S. Kahn I'll take a stab at it. We have a number of cases, for
instance one major international investigation that we're
starting now where our electronic evidence people, our
child support people and our forensic accounting people
are involved jointly on this assignment. We have cases
where along with the restructuring folks if there's an
accounting misstatement question or a fraud question where
our forensic accounting folks as well as often our
electronic evidence folks are involved in the cases we
could have, we do have cases where in bankruptcies they
need economic testimony in order for a confirmation of a
plan and we might have graphic support working along with
those other folks.
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FTI CONSULTING Page 22
I don't know if that answers your question.
J. Shafter So I guess what as a rough cut, what percentage of your
business in the other major lines then does come from
referrals based on the main contact being the business
restructuring advisory?
S. Kahn I don't think it's a very big ... If that was your
question ...
J. Shafter Yeah I'm just basically ... what I'm trying to derive here
is the potential impact on the non-business restructuring
lines from these departures. Is that going to impact
relationships and materially cross-selling into those
other lines?
S. Kahn Actually is some ways there were some situations where as
a result of the folks who were part of our organization
and the clients that they were working on that we were
stopped from either working the other side of a bankruptcy
case where we might be working for the company or for the
bondholders or cases involving unrelated litigation by
where one party might have been a creditor or a client of
the group that left where we might have been stopped from
doing the work.
These would be what we consider to be probably pick ups
rather than downturns. On the other hand clearly there
have been some cases where were it not for the
restructuring work being done we might not have had the
opportunity to do the, I don't know, claims management
work or fraud investigation or something like that.
We think there are some going both ways in that regard.
J. Dunn For purposes of the guidance, we started to look at 2003
and see what the relationship was both to work we had
gotten because we were involved in the restructuring with
the departing people and also started to look at
opportunities that we had turned down.
It was our judgment that while recent past is a good
indicator of the future, that it was really not fair to
add to our guidance by an amount that the delta would be
in that, so we did not. We looked at it and considered it
as a wash. Obviously we remain hopeful that it will be
better than that and we also have a tremendous amount of
referral work from the continuing restructuring practice
as well as a really good chemistry growing between the
forensic accounting and the corporate finance
restructuring group.
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FTI CONSULTING Page 23
J. Shafter Thank you.
Operator Mr. Dunn, please continue with your closing remarks.
J. Dunn Again I'd like to thank everybody for being here and we
will join you again the week after next with our full
report on the year end and continue to update our guidance
for the coming year which despite the travails of the last
2 weeks, we remain committed, focused and I think a
spirited FTI is very strong right now to produce for our
shareholders and to make this the company that we all set
out to make it to be. With that I'd like to thank
everybody and talk to you in 2 weeks.
Operator Ladies and gentlemen this concludes the FTI Consulting
2004 Outlook conference call. If you'd like to listen to a
replay of today's conference, you may dial 1-800-405-2236
or you may dial 303-590-3000 and enter the access number
of 570247.
Thank you for participating. You may now disconnect.
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