FTI Consulting, Inc.
Q2 2010 Earnings Call Transcript

Published:

  • Operator:
    Good day, and welcome to the FTI Consulting Second Quarter 2010 Conference Call. (Operator Instructions) For opening remarks and introductions, I’d like to turn the call over to Eric Boyriven of FD. Please go ahead, sir.
  • Eric Boyriven:
    Good morning, and welcome to the FTI Consulting Conference Call to discuss the company’s 2010 second quarter results, which were reported earlier this morning. Management will begin with formal remarks, after which we will take your questions. Before we begin, I would like to remind everyone that this conference call may include forward-looking statements within the meaning of Section 21 of the Securities Exchange Act of 1934 that involves uncertainties and risks. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues, future results and performance expectations, plans or intentions, business trends and other information that is not historical, including statements regarding estimates of our future financial results. For a discussion of risks and other factors that may cause actual results or events to differ from those contemplated by forward-looking statements, investors should review the Safe Harbor statement in this earnings press release we issued this morning, a copy of which is available on our website at www.fticonsulting.com, as well as the disclosures under the heading Risk Factors and Forward-Looking Information in our most recent Form 10-K and in our filings with the Securities and Exchange Commission. Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this earnings call. During the call, we will discuss certain non-GAAP financial measures such as EBITDA. For a discussion of these non-GAAP financial measures, as well as reconciliations of these non-GAAP financial measures to the most nearly comparable GAAP measures, investors should review the press release we issued this morning. With these formalities out of the way, I’d like to turn the call over to Jack Dunn, President and Chief Executive Officer. Jack, please go ahead.
  • Jack Dunn:
    Thank you. Good morning and thank you for joining us. With me on the call are Dennis Shaughnessy, our Chairman; David Bannister, our Chief Financial Officer; Dom DiNapoli, our Chief Operating Officer; and Roger Carlile, our Chief Administrative Officer. Our results were released first thing this morning and I hope you have had a chance to review them. If not, they are available on our website at www.fticonsulting.com. Since we last spoke, the business climate and our view have not changed. It is our goal on this call to briefly recap our second quarter performance talk about the new acquisitions we announced last evening with a separate press release and then open it up for your questions. As discussed on our previous calls, as a general matter pro-cyclical businesses continued to follow the trajectory of the improving economy, while a hungry high-yield market and at least temporarily sympathetic creditors continue to impact the restructuring side of our business. In short our pro-cyclical businesses have not improved as fast as we thought in our restructuring business has declined faster. Ironically, if we had anticipated that the same factors that would drive one, would drive the other and they have, just closer to the fulcrum of balances opposed to the wider and more volatile ends of the spectrum that usually mean good markets for us. A good example affecting all our business is the tepid pace of recovery in the M&A markets. Despite corporate financial positions that have materially strengthened over the past few years’ strong corporate liquidity and the debt markets I spoke of, the capital remains on the sidelines waiting to be invested. The uncertainty about regulation, taxation and where valuation might be headed, have quite correctly caused decision-makers to exercise caution and delay pulling the trigger. As I said, this dynamic has cut across virtually all our segments in the quarter impeding the antitrust work done by our competition economist, the volume antitrust second request processed by our technology segment, the number of transactions handled by our strategic communications segment in the amount of due diligence work performed by our transaction advisory group within corporate finance. With this backdrop, let’s look at our results which are consistent with our pre-release. Revenues were $349 million. Earnings per share were $0.52 and adjusted EBITDA $65 million or 18.8% of revenue. We generated 49 million in operating cash for the quarter with continued strong cash collections of stronger DSO’s than during the same period last year, and we exited the quarter with approximately $123 million in cash. Cash generation has continued strong and currently we have about 130 million on the balance sheet after buying back 336,000 of our shares during July. With respect the segments, revenues in corporate finance restructuring were $111 million down from $134 million in the corresponding quarter a year ago. This reflects a lower overall demand for restructuring and bankruptcy services due to the factors that I mentioned. Adjusted EBITDA in the quarter was 26 million or 23.4% of segment revenues, and we have taken steps to bring headcount into line with the current demand and incurred about $2 million of severance expense or almost $2.50 during the quarter. We have experienced some signs of stability of demand in the business over the past few months, so we are cautiously optimistic that our revenue levels in the segments have flattened on a run rate basis. The stability is encouraging to us as it facilitates our ability to manage the business in order to return margins to acceptable levels. Our forensic and litigation consulting segment is still operating in a climate, where corporate in-house counsels are aggressively managing their legal spending. But at the same time, the regulatory environment continues to be encouraging for us due to the increase pace of actions by the government agencies. Against this backdrop, FLC’s revenue increased nearly 6% over last year’s second quarter. This was a remarkable performance especially compared against the period last year when two large investigations were at full blast driving activity, utilization revenues, and margins. The revenue growth in recent quarter was attributable to the expansion of the segment into new markets such as Boston and Europe, and again to the outstanding performance of our specialty practices, such as intellectual property, insurance, healthcare, financial services and pharmaceuticals had excellent performance in trial services in our Asia investigations. Adjusted EBITDA for FLC was 19.3 million equal to 24% of the segments revenues. This compared to a margin of over 27% a year ago, which benefited from those large investigations. Economic consulting also had a good quarter. Despite the aforementioned softness in antitrust M&A assignments, revenues increased 13% over last year driven by strong growth in financial economics and network industries, more modest year-over-year growth in the antitrust practice as well as continued expansion of our international arbitration practice. Financial economics remains very busy in the securities litigation area and network remains busy in both the railroad and telecoms sectors. Adjusted EBITDA for Recon (ph) in the quarter was $11.5 million dollars or 17.7% of revenues. Our technology segment reported revenue of 43 million and adjusted EBITDA of 16 million, for a margin of 37%. Revenues declined versus last year due to significantly less antitrust second request work. On the pricing front, we believed our measures to address increased competition are working and our volumes are increasing. In addition, we continue to be more than encourage by the introduction of our new acuity document review offering. Early results are showing that we can dramatically lower our clients cost and increased their document review efficiency by a factor as much 4 or 5X. As you know this is a huge sector of the electronics evidence chain, perhaps as much $6 out of $7 that’s spent on electronic evidence. Previously this was untapped by us and a huge opportunity for us and for our company. The strategic communications segment continued to show improved results even within this mixed environment. Revenues increased by about 12% year-over-year to 15 million, which represents the highest quarterly revenue since 2008 While capital markets activity remains soft, the segment registered its third consecutive quarter of annualized retainer growth. Growth was led by a strong performance in the U.S., which has benefited from increase project work, most notably the Public Affairs Communications for Trans-Ocean in the Gulf of Mexico as well as development of several large retained clients. In addition, Asia Pacific revenues showed strong growth in the quarter as compared to the prior year. Adjusted EBITDA in the quarter was $8.6 million. This was over 17% of revenues, marking the highest level of profit earned in the highest margin percent since 2008. Now, I’d like to talk a little bit about the acquisition we announced last evening. As we have discussed several times, Asia is a major initiative for us this year. For several years, we have had the great advantage of excellent groups in investigations of strategic communications in that part of the world. Recently, with addition of great professionals like Steve Huyghe, Rob Morris, Mark Smith and the acquisition of Baker Tilly earlier this year and now, FS Asia Advisory. We are building a real critical mass and filling in our range of full capabilities housed in the region. FS Asia brings us 130 professionals that strengthen our list of blue-chip clients, who can avail themselves of all our services. Rod Sutton and his team joins Steve Vickers, David Holloway, Stuart Witchell, Ross Thornton, and Jim Kelly, in giving us a real presence, where we can offer investigations, strategic communications, forensic litigation, restructuring, corporate finance, construction and real estate services from professionals located in the region. In addition to corporate finance, restructuring turn around and corporate recovery, FS Asia’s specialties are formal liquidation assignments. This typical encompass restructuring and litigation forensic components. Typically, they are long live matters spanning several years and arise not just from financial distress but from corporate fraud. Rod and his team have an excellent reputation and should be both an excellent source of referrals to our other practices and complement to those practices giving as broad credentials when competing for international assignments with an Asian components. They operate in Hong Kong, Shanghai, Singapore, and Manila with annual revenues of approximately $35 million. They are a great addition to our team. Before I conclude, I’ll again review the revised guidance we provided a month ago. Our guidance is predicated on an outlook that is admittedly cloudy. As we said in our July call, assuming no change in market conditions, we expect our full-year results to be at the low end of guidance range. If business confidence improves and discretionary spending on litigation and M&A rebounds, we would look for improved results and then moved up into the middle or higher end of the range. Placing this in some perspective, unlike many companies, we are (inaudible) two record years, not to mention record quarters. Two of our segments had double-digit growth in revenues and adjusted segment EBITDA and a third, had impressive growth which given us market, must mean an increase in market share. As we outlined in our last call, it is not a question of if, but when the forces that are building up impact our markets first. And our goal in the meantime is to closely manage our discretionary expenses and headcount without damaging the franchise that we’ve built over the last 10 years that we so ably handle these issues when they arrived. With that, we would now like to turn it over to your questions.
  • Operator:
    (Operator Instructions) And will take our first caller, Tim McHugh with William Blair.
  • Timothy McHugh:
    Yes. Thank you. Can you just give us a little more color on the cost of service line overall. And then within some of the segments, you mentioned the severance expense, which generally was flat revenue that line was up a fair amount this quarter. So, just a little more color on what were the factors driving that.
  • Jack Dunn:
    Tim, in which segment?
  • Timothy McHugh:
    Overall. I mean we don’t have the queue, so we don’t know what the cost of service was in each segment. Maybe call out any specifics in the segments that were high.
  • Jack Dunn:
    The two things that maybe different than you would be thinking would be that the cost of service and corporate financials is basically flat quarter over quarter and that was driven by really two phenomena. One will be the additional severance cost in the second quarter, the fact that a number of the severance activities we put place in the first quarter, we still incur expense with respect to people as they work out their notice periods or finish up engagement, so what had you. So, we didn’t get the full benefit of first quarter reduction in force in the second quarter. And then I would say normal salary reviews and “inflationary cost” would have taken the cost up. These are the salary views conducted at the end of this first quarter. That would be the thing that might be a little bit different that you had modeled. The other factor would be technology. The cost is probably a little bit higher than you might have modeled. The good news there is up very dramatically. Pricing as we’ve discussed before has been a bit of challenge, so you do have a, a bit of a fixed cost element to that business and with the technology backbone and the servers and so forth. So, that maybe a little bit higher. I think the other segments would be pretty much in line with what you expect.
  • Timothy McHugh:
    Okay. And then on acquisition, can you give us a little more background on the firm. I know it was part of obviously a boutique over in Asia before but it seems like you’re just acquiring part of that business, had it separated previously from the rest of the business or is there a reason that you’re only acquiring a piece of it and not really the Australia operations.
  • Dominic DiNapoli:
    This is Dominic DiNapoli. The array (ph) of practice that we acquire is now cold (ph) at FS because they have separated from Feria Australia (ph), which is basically – they just had a relationship where they paid them a fee to use the name. So, we bought the entire partnership that was headquartered in Hong Kong. So, it was really not a split from the Feria (ph), it was actually a separate group from Ferris (ph), so we didn’t (inaudible) the acquisition. We bought Feria Hong Kong, which included their Shanghai and their Philippines practice.
  • Timothy McHugh:
    Okay. And then the demand for that in Asia, can you talk – I mean did they see a similar increase that you saw in the last two years and maybe a little slower environment lately or has the demand trends for that type of business been steadier?
  • Dominic DiNapoli:
    Well, they’ve seen a little slower this year versus last year. They didn’t have the bubble that we had last year, where we had a significant uptick in activity. They’re big game hunters like we are. There practice last year benefited from a several very large and insolvency cases, that’s where they make a lot of their money. But they’re very scrappy bunch, they’re very similar to the practice that we have in the U.S. and in Canada, and in the U.K. So, they’re approach client service is very similar and we think that they are a great fit culturally with the rest of our corporate finance practices throughout the world.
  • Dennis Shaughnessy:
    Tim, Dennis. The forensic talent that they have resonate in the group will fit very, very well with our ambitions out there and where we see demand curve moving and will help us address some of the client request that we’ve had that we generate inbound were not only coming out of Europe, but also coming out of the states here. So, I think while they certainly developed a reputation over the years as premier in insolvency firm, restructuring firm, about 40% of their business was forensics and we expect that will grow significantly over the next four or five years as we link it to the rest of our business.
  • Roger Carlile:
    One of the challenges we’ve had out there, Tim, is we’ve had – as Jack has said, a $10-billion client risk but with a very limited ability to serve those client. Steve Vickers is on the International Risk Operations, really has a who’s who set of relationships with the major financial institutions, the law firms, the international firms that have operations there and had some very important services that those firms would hear about, but it really didn’t allow them to move deeply into helping clients with significant (inaudible) out there.
  • Timothy McHugh:
    Okay, (Inaudible). That’s helpful. Is it fair to assume close to one times revenue or something like that for the purchase price?
  • Jack Dunn:
    I would say the purchase price is in line with what we normally pay, Tim, which is a bit higher than that.
  • Timothy McHugh:
    Okay. Thank you.
  • Operator:
    And will take our next question from Tobey Sommer with SunTrust.
  • Tobey Sommer:
    Thank you. Quick follow-up on your acquisition, is it fair to assume that you work with the firm in other engagements where you needed some sort of last mile execution that wasn’t within the breadth of your former infrastructure?
  • Jack Dunn:
    Tobey, yes, in fact we have actually had some joint pitches with them that have gone very well. We had a pitch for a major US company that was doing some work over there that – their folks and our folk sort of seamlessly integrated on the pitch. So, I think it is fair to say that we know them well. Again, Steve Vickers and the folks in Hong Kong know them very well. Surprisingly, Hong Kong is a pretty small town when it comes to these sorts of people, and there’s a good level of knowledge and experience out there.
  • David Bannister:
    We’ve certainly known them well over the last two years where we’ve had different chats with them at different times and, you know, have – know their presence in the marketplace very, very well. So, it’s like most of our transactions when we – if you say it’s a fairly homogenous type of marketplace, so we know them very well.
  • Jack Dunn:
    The other fact where we know them well be through the major financial institutions. So, for example, (inaudible) corporate financial list was out in Hong Kong for a couple of weeks meeting with the HSBCs and Standard Charters and then the major law firms and took chances where we have deep and rich relationships as do they and so there was a pretty high level of an ability to get comfortable that we would all work well together.
  • Tobey Sommer:
    Thank you, and I had a question for you about the bill rates. We read and heard a lot from some law firms that they’ve been under some stress and I guess pressure on bill rates and if I look back over during that expansion, the previous one, bill rate increases at law firms were pretty high. I was just wondering in an environment where that aspect – the legal aspect of professional services may not feel a lot of price inflation, how you think that may impact the consulting side that FTI operates in?
  • Dennis Shaughnessy:
    You know Tobey, it’s Dennis. I think there’s no nice homogenous answer. I think if the M&A activity that we know the interest is there, we’ve been (routined) on lots of banks. There just people are holding back. If that really accelerates, that is very agnostic to bill rates to kind of imagine, and I think the corporate law firms experienced that same thing. People want to get deals done. They are complex deals. They have a lot of risk if either don’t go through or there is issues with them, you know, much more active is justice department and commission looking at these things when they do mature. So, I think in that area, I don’t think either we nor the law firms would experience a lot of pressure on bill rate. I think in restructuring, as we move down the market, we’ve always said, we think there is more price pressure and we would probably hear the same thing from our cohorts in the restructuring group and the law firm. I think on technology without a doubt, there is price competition there. We’ve said that we’ve been extremely successful in actually picking up significant sign as generating lot of volume and holding pretty close to our margin. We lost some margin points, but I think we are still up around 37%. I think the one area where we still are seeing a whole (packed) budgets or a delay in spending money is still in general corporate litigation. Obviously we are going to see a lot of money spend surrounding the (golf) and again there is an awful lot of risk. There corporately, I think these General Counsels obviously want to control their spend but they also have to manage the risk. So, I would say you might get a mixed report from law firms. Some of the law firms, now they are having no problem with dealing in those areas, others might be. So, I would say it’s a mixed bag. Econ, we don’t expect to see it. In FLC, there’s still – people are really holding (line on that).
  • Jack Dunn:
    Tobey, one of our big drives across the firm but particularly in FLC, where you’d most likely see those sort of pressure is giving that direct relationship with the law firms is to move increasingly toward having true specialist, you know, folks who are almost one of a kind in their ability to deal with fine issues and move away from having generalized. I think the price pressure tends to be when you can be commoditized and they can say I can pick from this firm or that firm and solve the issue. So, in an economics, but increasingly in FLC, we have folks who are really sought after, because they bring unique expertise to the problem and there’s often – there’s less price pressure when you have that ability.
  • Operator:
    Our next question comes from Sidoti, David Gold.
  • David Gold:
    Wonderful of touch we can – just restructuring, please, did hear that stabilizing but just curious if you can flush out two things for me. One, when we say stabilizing, is that with say, the last month of the period, or is that, you know, to think about it as stabilized, basically the quarterly run rate. What’s basically has to be modeled out or think about based on what you are seeing right now?
  • David Bannister:
    David, on a revenue basis, the quarterly run rate is pretty stable from the prior quarter.
  • David Gold:
    Okay, and I guess, I think when we spoke about it last, it was – it has tail-blocked the first couple of months in the quarter and then stabilized that last month. Was that right?
  • David Bannister:
    Yes. (Charge of allowance) have been relatively flat from the end of May through the end of July.
  • David Gold:
    I see. Okay. And then one of – on the G&A side is lower than we had expected and just curious if that’s a new good run rate and if there was an incentive contribution to that of maybe a pull back.
  • David Bannister:
    There was an incentive contribution obviously with these results are – exactly as incentive comp will be significantly lower than we would hoped it would have been. In terms of a run rate, it’s…
  • David Gold:
    There was an impact there for the first quarter?
  • David Bannister:
    Yes.
  • David Gold:
    Okay.
  • David Bannister:
    I would say in terms of run rate, you are not – you know it’s probably a little – I think you need to be a little higher than that for a run rate for the back half of the year. The third quarter we have some significant marketing events that have gone on and (inaudible) in that quarter for the comps. So, you need to normalize that.
  • David Gold:
    Can you give a sense where new order magnitude have, how much more significant it could be or may be what the get back was?
  • David Bannister:
    I would say what, David, call me offline, and then I would – I need to work the numbers out, but I think that the number for the year is going to be around that 70 level.
  • David Gold:
    Around 70?
  • David Bannister:
    70 million. A little less than that.
  • David Gold:
    D&A
  • David Bannister:
    And corporate G&A.
  • David Gold:
    Got you.
  • David Bannister:
    It was 16 for the quarter. So, four times that is 64. I think it be will closer to 70 for the year.
  • David Gold:
    Okay. Got you. And then just one last one. It looks like a decent buyback in the month of July presumably some blackout there. Once life reopens, how we are thinking about share buybacks here?
  • David Bannister:
    I think we are, we feel the stock – we feel for anyone this is a great entry level to buy the stock from our perspective as long-term holders. Obviously some of us are buying in ourselves. I think you will see that (coupled to the fact) at these levels buying stock we are fortunate to have great liquidity, in generating great liquidity. We structured this acquisition will allow us to preserve that liquidity. So that won’t be a large cash drain. And I think you will see this very active there.
  • Jack Dunn:
    We have a $250 million remaining authorization of which we consumed about $11 million or so in the quarter, so we’ve got a lot of work left to do to get that done.
  • David Gold:
    Perfect. Thank you.
  • Operator:
    Our next question comes from Arnold Ursaner with CJS Securities.
  • Arnold Ursaner:
    Hi good morning. Normally in terms of your updating your guidance, you tend to do it only mid-year, you know, you tend to do it after Q1 or after Q3, so what I thought you might try to do for us is perhaps update your views on the back half of the year for each of your segments for both revenue and EBITDA margins, particularly given the cost adjustments you are making and the fact that you are in this transition period where some of your businesses are continuing to slow, some are getting better at different rates. Again, normally, you use the mid-year call to update your view, and now perhaps you could do that.
  • Jack Dunn:
    I will start off. In general, I think in restructuring if we have down the floor then I think you would see some degree of margin stability. We have taken cost out, you know, particularly in the US to align the personal complement what we see as demand. So, that should stabilize. We would not view it as expanding, but we could be wrong. I mean I think David said that there appears to be a stabilization on the last couple of months into hour spill there but things can burn off, can replace and so I would put a big caveat on that. I think in FLC, they’re operating in backward, we would expect them to be the specialty parts of the business, they’re doing extremely well. They are in the running to get several large pieces of business that are related to a lot of the things you read about in the papers and they get those, they’re utilization would expand and I would think we’d see a little margin improvement there but again I think we would expect them to operate around the margin they are right now. Has a big backup of business in competition which, the good news we’ve won all the deals, bad news or harming news they’re just not moving very well. If they would move then again I think you would utilization increase. On the litigation support side, our Econ guys were extremely busy and that’s one of the better margin sides of the business. So that they have the potential to increase slightly. FLC is increasingly slightly every quarter as they return back to a more historic margin. Again the rate of trajectory there while it is up and it’s good to comps, remember that they’re comping half off of a bad year last year because of the capital markets. So the real sequential rate of growth doesn’t allow you to have dramatic margin expansion. And if you remember that business, their highest margin business is one of the transaction side, especially M&A and some IPO for the specialty M&A side and again that still is in the doldrums. They’re doing very well for our new clients, it’s doing very well building your team business up, they’re just to define many yields out there, transactions. Tech, I think a lot of it will depend on the reception of acuity is very exciting that could move the margin. I wouldn’t expect it to move it dramatically in the second half we could start to feel it as there is more uptick when that product in the fourth quarter. and again if these M&A deals struck to break their second request business which was down significantly year-over-year in the second quarter would clearly move that margin up because the second request business as you know is very tent, it’s very short term driven, high billing rates, high value added, not a lot of concerned about pricing and that would help that margins significantly.
  • Dominic DiNapoli:
    Another thing I would like to add is we still investing for the long term here and as evident our recent acquisition, Corp Fin is expanding in Spain, they’re expanding in Germany, all those investments that we planted at the end of last year and the beginning of this year, FLC is continuing to grow in South America and in Asia and we think there is great synergies between our new acquisition with just between FLC and our Corp Fin practice. So we’re taking this opportunity to invest and we do have a long term horizon on growing these businesses.
  • Arnold Ursaner:
    Thank you. Again I maybe perhaps simpler question, at the beginning you had talked about restructuring being negative in terms of revenue growth, but all of your businesses you had expected double-digit growth as we sit here midyear, how would you update that previous forecast?
  • Jack Dunn:
    I would say clearly we don’t expect that and I think that’s driven really by the fact Arnie, the economy is not returning at a pace that I think most of the people were predicting in this gain a year and the capital markets are certainly not returning all the debt market has been very liberally, equity markets have not been and we were gaining a big backlog of cases in the fourth quarter and the first quarter in M&A, it really seemed to hit a wall in the third quarter. A lot of those cases were still there, people are still look they got the targets, topping the targets but it’s just slowed down dramatically for I think a wide variety of reasons and we fact that this with the major I-Bank M&A divisions and they experience the similar slowdown in that again starting about the end of the first quarter and we’ve also talked to the major part law firms who again confirm at the same thing. So it’s really I think a lot macro driven, the growth is there, we would not expect double-digits in all of the groups clearly, some of them Econ will probably have double-digit growth FLC, most likely won’t because of the great year they lacked and you just don’t have the overall demand. Tech, would not because pricing, that there is pricing pressure there that is probably greater than we anticipated but the good news is we have expanded our market share and are making an up in volume.
  • Arnold Ursaner:
    Maybe a polite way to try to wrap it up one more way is all in consolidated, do you expect organic growth and revenue this year?
  • Jack Dunn:
    No, because of the dramatic decline inter structuring.
  • David Bannister:
    Arnie, the lower end of our guidance is a $1.4 billion, we think if everything stays the same that or hit and that’s what we had last year. There is no acquisition, there is no significant acquisition affecting any of that.
  • Arnold Ursaner:
    Jack Dunn, I look forward to seeing you at our conference. Thank you very much.
  • Jack Dunn:
    I look forward to it. Thank you.
  • Operator:
    And we’ll take our next question from Joseph Foresi with Janney Montgomery Scott.
  • Joseph Foresi:
    Hi guys, I wonder if I could ask first just about Europe, maybe you could give us an update, I know that things had come to sort of a halt in that particular region, based on the last call that we had, maybe you have any updates on sort of what’s taking place there and what’s built into guidance for the rest of the year?
  • Jack Dunn:
    Sorry, what region?
  • Joseph Foresi:
    Europe.
  • David Bannister:
    Well I would say a couple of things, Europe clearly has slowed dramatically in our corporate finance business. It’s down possibly 20% to 25% year-over-year and I said I think again we keep repeating this, our guidance assumes no change in the current operating environment so we don’t have any assumption that is going to improve dramatically there in the back half of the year. The low end of our guidance. If it does start to improve that’s how we before we start moving into the mid to higher end of the range of our guidance. Strategic communications had picked up somewhat, I would – the larger pickup in strategic communications is actually been in the US but they’re seeing net retainer wins in Europe for the last three consecutive quarters which is a very good news. Capital markets activity continues to be very slow there, so there is not, there is not an ITO calendar, there is not an M&A calendar, but notwithstanding that their business has picked up some. The economics business is a new business for us there, so that is doing quite well, growing nicely but is still – it does not have a significant earnings contribution to it yet. It’s a fresh for operations, it’s a startup.
  • Jack Dunn:
    I think we – as we mentioned last time, the election and the budget issues there that kind of just squaring effect and I think as people get back to work (inaudible) I think that will mean some increased work for our economic and so and I think it will also mean increased activity for us in our communications for our governmental affairs. So I would – I remained hopeful about Europe being better towards the back part of the year.
  • Joseph Foresi:
    But based on last call, you haven’t seen any change there it sounds like.
  • Jack Dunn:
    It’s been a month, we really haven’t seen anything much different from where we were a month ago.
  • Joseph Foresi:
    Of course and I was just wondering in this present guidance it sounds like you’re not including any potential acquisitions and are you pretty much done with the headcount cuts?
  • Jack Dunn:
    The acquisition, because of the new accounting for acquisitions obviously the one we just made really will be offset our expense all of your acquisition expense. So the impact of earnings being almost to minimus on a net basis next year, it definitely will be accretive and we haven’t made any other acquisitions this year of any size that will move the (inaudible) we are talking to people, we are engaged in conversations from other acquisitions, but again it’s just the timing as you move into the third quarter then the fourth quarter, even if you close the deal it will have very little impact in this year.
  • Joseph Foresi:
    And the headcount cuts are pretty much done.
  • David Bannister:
    Yes, with the caveat that again we feel that we have found a floor in the corporate finance group but I think we found we had a floor in the first quarter, so if this continues to hold at these hourly aggregate hours build before then I think you’ll see it’s stabilized.
  • Joseph Foresi:
    Okay and then I wondered Jack, you could give us a general sense of what you think you’re visibility is on that lower end of guidance, if you could put percentage on it?
  • Jack Dunn:
    Again the lower end of the guidance assumes that things continue as they are now, we don’t have a reason to believe that they won’t continue as they are now or lower and we don’t trajectories going down in any of our businesses relative to current run rates.
  • Joseph Foresi:
    Okay. I’m sorry, that’s right, I understand and then just lastly it seems like litigation has slowed and maybe you could talk about is there a backlog growing versus maybe a change in the litigation industry permanently going forward, maybe you can just give us your opinion on just sort of how you see that playing out.
  • David Bannister:
    In the specialty areas we’re doing very well, in IT, insurance, pharma, construction. So I think in those areas, they’re significantly up. FLC, had an up quarter and it was lapping a first half where it had made off and stamper growing (ph) as we started both of those investigations last year. So I know everybody else is saying litigation is down for us it up. It may not be up as much as we expected given that we thought there will be more of a catalyst to litigation with the government and I think some of the large issues that you’ve read about, some of which we have been involved in, are settling, so that they’re not moving into a litigation phase even though we may have been involved in defense investigation work for people or discovering. So I think that we view it as a good first half for that group given what they had to lack the prior year and at least what we’re seeing is litigation is up, now maybe it’s only up in a lot of these specialties but our Econ litigation support group which does all this complex securities work and does a lot of complex damage model building is extremely busy. So I think if you look at those two barometers, we’re seeing litigation, now how much of it is classic civil litigation, one group suing another over dispute or how much of it is driven by governmental action. I think there you might, if you got more granular you might still say civil litigation isn’t up that much, but without a doubt we’re experiencing increased demand.
  • Jack Dunn:
    Yes and then if you remember too, I personally believe that the general commercial litigation is still slow because that tends to be a little bit more of a discretionary expense but if you think about our economic consulting, a lot of people who would be our competitors would be reporting litigation be reporting purely in FLC type situation but if you look at the results where we had impressive growth in Econ that growth was driven by litigation by big ticket securities litigation class action, securities litigation. So I think back to your original premise I think because of our specialty practices it’s pretty impressive and I think yes there is a backlog that’s going to get even better, I think we’re seeing the cases pile up, out of the recent phenomenon whether it’s the municipal debt issues, whether it’s out of the Gulf of Mexico, whether it’s any number of things, I think you’re going to see more litigation again towards the back half of the year.
  • David Bannister:
    You also have different pockets of strength depending upon the US attorney’s office and how opt they are, New York in particular is very, very busy.
  • Joseph Foresi:
    Okay, thank you.
  • Operator:
    We’ll move now with Signal Hill, we have T.C. Robillard.
  • T.C. Robillard:
    Yes, good morning. Thank you. Just wanted to get a little more color on what’s driving the strength in strategic communications in the US and is that to be viewed as a precursor to some demand in some of your other segments?
  • David Bannister:
    Strategic communications extremely involve in matters in the Gulf oil spill. So they have been very involved in that. That has helped, they have some very increased mandates from the large corporate clients Fortune 100 size clients that are working on certain issues that require increased help from us in that area. And they are increasing their retainers, so they’re winning net new companies, like a lot of companies probably have been analyzing the last year, how they’re going to spend their money when they start spending it and they’ve started making changes. Normally those changes are made after the first quarter after you get through, get through account of your company, your reporting, your shareholders meetings, your annual reports and things like that. And so we’ve been fortunate to win much of a new business or project basis as well as gaining new clients.
  • Jack Dunn:
    I think we used the some of the period during the last year when we were a little quiet, to work on that practice, we have a dynamic leader there, Ed Reilly, he took over about a year or so ago. he and his leadership team have really done a great job of really going after the big corporate business and have made the most of their opportunities during a time like this you see a lot of kind of change over in clients as they kind of lower their level of activity and he has been there and his team to capitalize on that. We have dramatically new big clients that will be built to less. So yes, I think you’re seeing key change there. We believe that market has bottomed and we have a great future in it.
  • T.C. Robillard:
    And do you feel that that can open doors or give you a better platform for cross selling particularly since SC historically has been much more focused in Europe?
  • Jack Dunn:
    Yes, it already dramatically has.
  • T.C. Robillard:
    Okay and then just real quick, David on the SG&A line, little bit of step down there is some 24% in terms of percent of revenue, is that sustainable, was there anything that maybe just kind of got shoved into the early part of July, so it didn’t show up in June. I’m just trying to get a sense of how we should be thinking about that line item for the next couple of quarters?
  • David Bannister:
    Not the latter, the one thing I pointed out as mentioned earlier in the call was the reversal of some bonuses in the quarter. So the run rate would be somewhat lower than or the state of rate would be somewhat lower than the run rate.
  • T.C. Robillard:
    Okay, perfect. Thank you.
  • Operator:
    We’ll move now to Scott Schneeberger with Oppenheimer.
  • Scott Schneeberger:
    Thanks, good morning. With regard to the acquisition I think some questions earlier touched around it, but did you say that it would be roughly EPS neutral in ‘010 and accretive in ‘011 and then on top of that, to what magnitude, what type of margin are you buying this at and I think you mentioned that that was consistent with past multiples, could you just give us a little elaboration on what past multiples paid for such a business for? Thanks.
  • David Bannister:
    As said the because we have to expense deal cost now we would not – its only a five months left in the year, we wouldn’t expect it to have any material contribution one way or the other in terms of earnings this year. Next year, it’s probably – depending on activity levels of what it’s probably somewhere around $0.10 to $0.15 accretive.
  • Scott Schneeberger:
    Okay, thanks. And Dave any commentary on the margin at which you that was spinning (ph) off.
  • David Bannister:
    It’s a very good marketing business that will be, it will be comfort to the margins in our corporate finance business when it’s running well. So I don’t say it’s – again we haven’t worked through all the purchase accounting and so forth and so on yet but it’s a (inaudible) margin business.
  • Scott Schneeberger:
    Okay, thanks. And any further commentary on multiple pay, there or you’d given us much as you intended to give?
  • David Bannister:
    Again we’ll – well we need still flush out to be able to answer the question fully as the new purchase accounting earn outs, this will have a in terms have a continued payment element to it and we haven’t worked with our outside valuation firm to finalize that number yet, so I just assumed defer on that till the end of the quarter when we report those numbers correctly. But it’s a multiple consistent with all the things we bought.
  • Scott Schneeberger:
    Okay, thanks so much. On tech consulting, a solid margin for the quarter. what is your – do you continue to think maybe low 30% or might we see something higher going forward on expense management and then on a follow-up on that, any consideration on the spin-off on that segment? Thanks.
  • David Bannister:
    They’re doing a great job with expense management already. So I wouldn’t expect to see any gains from expense management there. They are in the running or some extremely big jobs, they could get in the second half because of the fact that they would be probably time sensitive jobs, you could see the margin impact just because of the scale and the billing on those jobs. The – I would not – I don’t think there is any interest rate on any spin-off of tech. we are launching this new technology we’ve spent collectively probably over $40 million in the last two years just on the development of this new technology. The initial results are extremely exciting to us as Jack said, this is an area where you’ve never been. Its huge spend and it’s being used in one enormous job right now for clients and I think they’re amazed at the response they’re getting from it. So I do want this to play out, we would want this technology to give a broader reception, trial and we have several doc releases that will be following in into the market which we think if there was going to be a spin-off, it could be a much more exciting company after this technology is more fully absorbed by the marketplace.
  • Scott Schneeberger:
    Thanks and one more if I could, in FLC I noticed headcount higher sequentially in year-over-year. Does that have to do with just targeted hires and focus on specialize as opposed to your general list. If you could just maybe take us a little deeper there.
  • Jack Dunn:
    That would be the second or if we would include the (inaudible) acquisition we did earlier in the year, which was not that large, it was about 15 people or so. We have been adding in the construction area particularly, a few folks out in Asia in the construction area and in Europe (inaudible) Roger, I think those were the two big changes in that segment. And then we continued rotating (ph) the headcount in the more specialists. So we had some very, very good hires in the area.
  • Roger Carlile:
    But we have also been adding actuarial capabilities into our insurance specialty business that was mentioned earlier as well.
  • Operator:
    Our next question comes from Paul Ginocchio with Deutsche Bank.
  • Paul Ginocchio:
    Just on the second half revenues for at first, Asia. Should we think about that similar to what, half of what you (inaudible) run rate or can you give us any color on what it looks like in the back half?
  • Jack Dunn:
    Less than half, we won’t have it for full half of the year. We are hopeful that we will close it, essentially we will have a good five months of operations, 4.5 to 5 months.
  • Paul Ginocchio:
    Can you give us any kind of any kind of range or growth year-on-year?
  • David Bannister:
    I think too fit (ph) will be, numbers we reported in the press release will be consistent with what we would expect it to do for this year.
  • Paul Ginocchio:
    On the share repurchase, were you restricted because of this acquisition in July to buy back shares?
  • David Bannister:
    No.
  • Jack Dunn:
    No.
  • David Bannister:
    In terms of the philosophy on that, obviously the stock traded very weakly with a lot of volume. We were restricted for the first week or so until the pre release was into the market. So we were able to compete aggressively when the stock had high volumes trading in the 32 to 33 range. Our view is we do want to buy in that remaining $250 million of stock prudently. We don’t want to be competing with other bidders. We don’t think we are in the business of trading securities. So we are going to get that done but we are not going to be aggressive in any given date trying to move the market. The other challenge we have, given the nature of just standard share repurchase is we can only represent so much of the volume during a given day or what have you. We had some pretty low volume days when we were in the market. We did shut the window again around this release. So about a week ago, we shut it down again, we will keep it shut for a few here. That is probably conservative on our part because there is not a lot of new information in this release but we just again want to be careful about not doing share repurchase when there is information needed to get into the market.
  • Operator:
    From Macquarie, we have Kevin McVeigh.
  • Kevin McVeigh:
    Just a follow-up on that, not to believe in a share buyback but when you think about capital allocation acquisition versus buyback given kind of where the stock is today, do you see more emphasis on the buyback as opposed to acquisitions?
  • Jack Dunn:
    No, I mean I think we are looking at a deep – we test all the acquisitions against the impact of buying our stock back. So I think as we analyze the impact going forward, the acquisitions really have to demonstrate thus for profitability and a growth perspective either directly or indirectly that would offset the use of capital to buy back shares. I think the capital markets on the debt side, are very favorable right now and we could clearly get anything financed that we wanted to if we have almost every major eye bank banging on our doors, kind of refinance our bonds and do a much big replacement at these lower rates. So I really think we are in a position to execute the buyback plans we have on a sensible basis and I don’t see it being prohibitive to any acquisition discussions that we are having.
  • Kevin McVeigh:
    I know the hires in Forensic and Litigation Consulting, were they primarily more senior or junior level, the mix on that are pretty consistent with what the company has done historically?
  • Jack Dunn:
    I think on the specialty practice they tend to be more senior. As Roger said, we are actuarial talent into the insurance practices because they are growing so much. The Becker (ph) people would have been our next, of senior and junior people at Hong Kong and I think as we move to a more specialist model there, the logic that takes, the people can have the most impact and to be more senior.
  • Roger Carlile:
    The people that I mentioned earlier that we hired in Asia are all senior people who were brought into really run practices as opposed to just do one-off client service.
  • Operator:
    Our next question comes from Bill Sutherland with Boenning and Scattergood, Inc.
  • Bill Sutherland:
    Couple of numbers for you, Dave. Did you give the DSO?
  • David Bannister:
    We did not, I will get that for you, Bill. It was slightly improved.
  • Bill Sutherland:
    From the prior quarter?
  • David Bannister:
    Prior quarter or the prior year.
  • Bill Sutherland:
    Looking into the back half as far as cash, CapEx is going to run about the same level?
  • David Bannister:
    CapEx for the year should be $34 million to $40 million and that’s going to be slightly higher in the back half of the year. We have got some larger expenses in the technology segment in the back half of the year.
  • Bill Sutherland:
    Okay. And then if you look at acquisition payments aside from FS that you need to do in the back half?
  • David Bannister:
    There is one earnout payment in the back half of the year, I think it’s around $9 million or $10 million bill that will go out in October timeframe.
  • Bill Sutherland:
    And then any additional severance at this point for Q3?
  • David Bannister:
    No.
  • Bill Sutherland:
    And then last on Acuity, that $40 million number, kind of I messed it up, that you have invested, what has been the split there between capitalized and current spending?
  • David Bannister:
    Most of it is current. We don’t capitalize much of the RD at all and that’s accumulative number of two years since bought at 10x (ph). But obviously we made a big investment in these new products and I think we are only now beginning to see the traction. So we are very optimistic that that investment is going to pay large dividends for us.
  • Bill Sutherland:
    And then, when you described the one placement you have, that kind of like a commercial beta that you are running with the client and –
  • Jack Dunn:
    We are out of data, we ran the beta last year with a big client and go extremely good results out of it and obviously a great testimonial. Now this is a very large assignment for, again, corporate 500 size company and that’s a real deal.
  • David Bannister:
    Those DSOs are 73 versus 75 last quarter.
  • Bill Sutherland:
    So, we should expect kind of what kind of rollout plan for Acuity, just in a real general sense?
  • Jack Dunn:
    It’s hard to say. What you need now is trials. So you have a beta testimony, you have this testimony that’s clearly in the works. There is a lot firms that are involved in this deal where it’s being used, a lot of law firms are looking at it. The client obviously is very pleased so far with the results that we are giving them. And so, I think it really is going to blow down to how we introduce these results into the marketplace, it’s not as you know a marketplace that, I am not trying to say the users are technological phobes or anything but it’s not early (inaudible) marketplace. It’s a trial and it takes some getting used to it. It is a different way of doing it. It’s not dramatic disremediation but it certainly is different. So with all different approaches in this area where you are talking about litigation or you are talking about document production for M&A, it’s different. So I think you would see us emphasize trial and introduction over the balance of the year and really start to get the benefit from the uptick next year. I think that releases, some of them will be released by the end of the year and they would add new capability, features to it, maybe a steroid or pet to the speed after people get a little more familiar with using the product.
  • Roger Carlile:
    The important thing on Acuity and we have got a number of our key folks in the segment working on it is that it really is – the scale of the problem of the discovery is only growing. So while if demand in any given quarter maybe higher or lower due to second request volumes or litigation volumes, what have you, the scale of data that needs to be dealt with really is growing very dramatically. And what we are excited about here is this is a great opportunity for us to in a very material way help clients deal with a significant cost problem. So while it should be a very good and profitable business for us and one that can grow quickly for us, as importantly, it can dramatically change the game for how clients deal with the issues and the kind of cost structure they are looking at. We are talking about four to five times efficacy right now with the product as it exists, then we hopefully keep improving on that. So this is a game changer, if we continue to have the success, we will (inaudible).
  • Operator:
    (Operator Instructions) Our final question comes from John Emrich with Ironworks Capital.
  • John Emrich:
    My questions were answered, thanks.
  • Operator:
    That concludes the question-and-answer session today. At this time I like to turn the conference back over to management for any additional or closing remarks.
  • Jack Dunn:
    Thank you very much again everybody for joining us and we will look forward to speaking with you after the third quarter. Thank you.
  • Operator:
    Once again, ladies and gentlemen, that does conclude today conference. Thank you for your participation. Copyright policy