FTI Consulting, Inc.
Q3 2010 Earnings Call Transcript

Published: 6 Nov 2010

[Operator:]

Good day, everyone, and welcome to the FTI Consulting Third Quarter Earnings Conference Call. [Operator Instructions] For opening remarks and introductions, I would 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 third quarter results, which were reported earlier this morning. Management will begin with formal remarks. After which, we'll 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 involve 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 the earnings press release we should 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, Eric. Good morning, and thank you, all, for joining us. With me on the call are Dennis Shaughnessy, our Chairman; David Bannister, our Chief Financial Officer; and Dom DiNapoli, our Chief Operating Officer. Our results were released first thing this morning, and I hope you've 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 in our view have not changed. It is our goal on this call to briefly recap our third quarter performance, and then open it up for your questions. As was true last quarter, as a general matter, our pro-cyclical businesses continue to follow the trajectory of the improving economy, while the high-yield market, and at least temporarily sympathetic creditors, continue to impact the restructuring side of our business, with the continuing caveat that M&A and capital markets work remain very slow, and that affects almost all of our segments. Unlike last quarter, however, where our pro cyclical businesses did not improve as fast as we thought, and our Restructuring business declined faster, in the third quarter, growth in our pro-cyclical business all but offset the decline in restructuring, even comparing to a record third quarter last year. The harder part was equaling the profitability of the declining restructuring revenues, which at the margin are our highest. As I said, our third quarter revenues of $346 million were down only slightly from our third quarter record $349 million a year ago, despite a 14% decline in our Corporate Finance/Restructuring segment. Excluding Corp Fin [Corporate Finance], aggregate revenues of our other segments increased about 7% year-over-year, with outstanding organic growth performance in Forensic Litigation and Technology. The $346 million of revenue in the quarter was also fairly consistent with the $349 million that we reported in the previous quarter, which supports our view that we are bumping along a bottom here while we transition through the economic cycle. Adjusted EBITDA in the quarter was $65 million compared to about $78 million a year ago, again, hard to top the profitability in Restructuring revenues generated at the peak of a bankruptcy cycle. The third quarter adjusted EBITDA margin was 18.8%, down from 22.3% a year ago, but again virtually identical to the second quarter. Our EPS in the quarter was $0.47 compared to earnings per share of $0.70 a year ago. EPS included a $0.07 charge for the early extinguishment of debt in connection with our financing activities, which I will go into in detail in a few minutes. Excluding this charge, our adjusted earnings per share was $0.54. Our tax rate in the third quarter was a more normalized 38% compared to 32% in the prior year period when we implemented some strategies to enhance our tax position. The impact of the prior year tax benefit, however, was ameliorated by the positive impact to earnings per share from a reduced share count as a result of our continuing share repurchase program. Behind the numbers, there were two important stories worthy of highlighting, the major improvement we achieved in our capital position and the progress we made in our international expansion. We have often talked about the importance of having a global presence in order to serve our clients wherever their problems are and wherever their capital flowed. The fruits of our investments on this front continue to pay off as our revenues outside the U.S. increased a robust 16% for the third quarter, and grew as a percent of total revenues from 19% a year ago to 22% this quarter. Growth was also robust in the Asia-Pacific region where we have made major investments this year and have seen growth in our Asian investigations practice. Our international arbitration practice that we've been building in Economic Consulting continues to gain traction in the market and also posted a strong revenue growth from the prior year quarter. The acquisition of FS Asia Advisory, formerly Ferrier Hodgson Hong Kong Group, one of the preeminent restructuring firms in the region, is another important step for us that greatly enhances our critical mass in the Asian market and solidly positions us to participate in the capital flows going into that market. We are now better able to advise our clients who are investing capital in Asia with on-the-ground resources and local marketing knowledge and expertise in restructuring, due diligence of FCPA specifically, as well as a broad set of capabilities across our Corporate Finance/Restructuring, FLC, Strategic Communications and Technology segments in Asia. We now have 335 people in Hong Kong and throughout Asia, rivaling Washington and Chicago to be our third largest office. At the corporate level, an important strategic accomplishment in the quarter was the financing we put in place that provides us with fixed low-cost source of capital to fund our plans for growth and expansion. We originally set out to take advantage of the current very favorable conditions in the debt markets to raise $350 million. The response to our offering was very strong, and we were able to increase the capital raised to $400 million with a maturity in 10 years and secure an attractive rate of 6 3/4%. Proceeds from this offering enabled us to retire $200 million of our 7 5/8% notes that were due in 2013. So we were able to extend our maturity schedules at lower interest rates and raise net cash of $187 million to execute our business plan. During the quarter, we also entered into a $250 million five-year credit agreement that replaces the $175 million credit facility that was due to mature next year. This also provides us with more capital to invest in our business. Now I'll look at the segments. Revenue in our Corporate Finance/Restructuring segment in the quarter was $109.7 million, a decline of $18 million or 14.1% from a year ago and slightly less than the $111 million in the prior quarter. Our second and third quarter results compare against the peak of the restructuring cycle in the middle of 2009 and reflect the significantly lower level of activity in that market. Adjusted segment EBITDA was $26.7 million the quarter, equal to 24.3% of revenues. This was down from the extremely high margins at the peak of the cycle but in line with the 2010 second quarter. We are managing headcount and expenses in the business to maintain our margins. The Forensic and Litigation Consulting segment had an excellent performance in the quarter. Even comparing against the year-ago period when we were extremely busy with two large fraud cases, FLC reported an increase of 12% in revenues for the quarter. The vast majority of this organic growth, one of the strongest organic growth rates for FLC in recent history, was driven by an overall increase in corporate litigation and investigations activity, continued strong results from the regulated industries practice, especially in healthcare and pharma, the Ibero-American and Asian investigations practices, several new FCPA investigation and cases arising from the financial crisis and mortgage-backed securities. Adjusted segment EBITDA in FLC was $20.2 million, equal to 24% of revenues, up from $18.6 million a year ago. Adjusted segment EBITDA margins were down a little from a year ago but consistent with the 2010 second quarter. In Economic Consulting, revenues were flat year-over-year at $59.4 million despite continued slowness in antitrust M&A, of continued strong growth of our European operations and good securities and financial litigation activity, such as the Terra Firma versus Citigroup case where Dan Fischel and his team helped our client and the folks of Paul Weiss achieve a stunning victory yesterday, added to the mix and kept the business going. In addition, our activities in international arbitration continue to pick up steam, and our investments in building out that team are paying off. Adjusted segment EBITDA for ECon [Economic Consulting] was $11.9 million compared to $14 million a year ago, and adjusted segment EBITDA margins were 20% of revenues compared to 23.4% of revenues a year ago. Our original view that we will participate in the eventual upturn in strategic M&A and large investigations remains intact. Companies have come out of the recession with an extremely high level of liquidity and in absence of momentum in developed world economies are likely to look outside their home markets and make up the slack with dealmaking that takes them into higher growth market. We're pleased to see that activity began to pick up during September, and this momentum has continued through October. Technology also had an excellent quarter. Revenues grew 10% to about $43 million on the strength of increased litigation and investigations activity, increased hosting volumes and the continued success of our Acuity document review service offering. While M&A Second Request and certain product liability engagements remained below normal, Technology experienced faster growth outside the U.S. from increased work on litigation and regulatory matters in Europe and Australia. Adjusted segment EBITDA in the quarter increased 20% to $13.9 million, and the adjusted segment EBITDA margin in the quarter was a strong 32.6%. We have aggressively managed expenses to maintain margins in the face of competitive pricing in this segment. In the absence of buoyant M&A and IPO markets, Strategic Communications continue to recover from the impact of the recession. Revenues in the quarter increased 6% to a little over $50 million, the best revenue figure for this group since 2008. The Americas contributed a good portion of the growth as they continue to increase the breadth of their engagements with key accounts and were helped by crisis work on Transocean. And Asia-Pacific also had strong performance. Business trends overall have improved in 2009, and the segment recorded its fourth consecutive quarter of net annualized retainer wins. Adjusted segment EBITDA margins improved to 14.4% in Q3 from 13.8% a year ago, thanks to the strong management of expenses. To sum up, while we managed through the transition of the economy, we are working hard to put in place the operational and financial infrastructure that will promote our continued success. We are strengthening our ability to service our clients on a global basis, with greater critical mass and broader expertise in the regions with high growth potential, and these efforts are paying off. We continue to make selective hires on acquisitions that deepen our skills, and these investments are increasingly getting traction in the markets as they gear up. And we have put in place a robust capitalization that provides us with a fixed low-cost sources of funds to enable us to invest in those assets, which will drive our growth. With that, we'll turn it over to your questions.

[Operator:]

[Operator Instructions] We'll go first to Tim McHugh with William Blair & Company.

[Timothy McHugh:]

First, I wanted to ask about the Restructuring business. If I just heard that the acquisition you made in that segment, it seems like revenue still fell off a little sequentially there. In the last call, I think you had suggested you felt like you're starting to see signs of stability over the last couple months. I can't remember the comment exactly, but I think it was the last few months. Does that mean the business fell off later in the quarter? Or can you give us an update on sort of your sense of stability there or if you think we're starting to get to a base level?

[Dominic DiNapoli:]

Tim, Dom DiNapoli. I think we've stabilized that business. I don't see a falloff. As a matter fact, there's been some slight upticks in activity. Certainly, the Asian acquisition added to this year and to this quarter, and we're expecting great things from that. But there were a number of factors, the headcount was down when you exclude the 94 people that we added in Asia. So our utilization is starting to pick up a little bit to levels that we're more comfortable with. We did right size the business as you know. We took some people out of the healthcare, so we've rebalanced the healthcare practice. On the success fee side, we're about the same as we were in the last quarter. So it wasn't the success fee side that changed the numbers. I think we're at a point now where we've right-sized the business. We're seeing good activity coming in, and we're pretty comfortable going forward that we're positioned now at the staffing level that's appropriate for the activity that we see coming down the pipeline.

[Timothy McHugh:]

And then my other question would be both for the Restructuring as well as Economic and then maybe for Communications here. Can you elaborate a little more on your views on how M&A impacted you this quarter? And then going forward, you started off with a comment that it was very slow. The headlines would suggest that's at least late in the quarter, it was good. Is it just delayed impact from that and then maybe talk about that?

[Dennis Shaughnessy:]

I'll take the M&A. I think we saw a significant slowdown in matters where we're already engaged, and they just simply weren't moving. So I think that's how much that is people were seeing back, trying to get aligned on what was going to happen post-election or whether they were concerned about their own businesses slowing down and wanted to get a better feel of what the second half looked. There was a precipitous drop at least in our engagements moving forward, as well as new engagements being booked in the competition area. So I think that we just didn't see it. It's starting to pick up. We're starting to see some of the engagements where we were already retaining, starting to heat back up again. And I think that overall, the group is obviously doing very well. This is the one missing piece. And it does sort of flip-flop quarter-to-quarter. They have really good first six months in competition, but it really slowed down in the third quarter. So we're cautiously optimistic that with maybe a little more stability in the marketplace, a little more predictability on the political landscape that you'll start to see people pulling the trigger on some of these deals. In Strategic Communications, it's really the same thing. Our backlog in capital markets work is huge. I mean we have lines of clients in Europe and the U.S. who would love to access the equity marketplace and are simply waiting for a hospitable market. I mean I think you would probably have as good perspective on it than any of us. Right now, it just isn't there except at sort of very limited windows opening up for unique offerings. But the business is there, once the capital markets signal. So they have really improved their operations through new client wins, standard retained business, not only stabilizing but growing, and then a lot of the crisis work the companies still need for a wide variety of issues around the world.

[Timothy McHugh:]

You once said before, roughly what size or how big your M&A exposure is. Can you remind me of that? Or if you have that or remember that off hand?

[Jack Dunn:]

I would think M&A conservatively has a 10%, 15% influence across all of the groups.

[Operator:]

We'll go next to David Gold with Sidoti.

[David Gold:]

So just to follow up on the Restructuring question, Dom, if the business feels stable and I guess gelling that with Jack's comments that you're going to manage the business headcount and expenses to maintain margin. Does that suggest that basically you've managed those expenses to sort of this level to that stability?

[Dominic DiNapoli:]

Yes. As I mentioned, we have reduced headcount. We're watching all non-necessary expenditures, yet we're still making investments in people and marketing as we believe is appropriate to grow the business and be positioned when the Restructuring business does come back, which it will.

[David Gold:]

And then can you speak for a second there, assuming that we're in a declining period for sometime, just a little bit of a reminder on the fungibility of the at least the junior levels with professionals there?

[Dominic DiNapoli:]

Well, the two practices that have staff with the most similar backgrounds and skill sets are Corporate Finance and our FLC practice. So we can move the people back and forth. So we don't have to build those two practices as silos. And we do have mechanisms in place to reward moving people back-and-forth. And probably where you see that the most is in some of our developing regions including, Asia where we're working with the practice leaders in both Asia and South America, Spain in particular, are one of our newer offices, to really move the people across the practices. So we don't feel the silos, particularly you don't have the market dominance that we have in the United States for the individual practices. So working together as a team, is much more efficient, and the go-to-market strategy is to play bigger. Even though we may not have as many people, we work together. And with the skill sets that are the same, they really are pretty interchangeable.

[David Gold:]

On the litigation front, I'm pleased obviously to see some tick up there. Just broadly, thoughts on both sustainability and basically what's gotten us to the thought-out and how many of that something that you expect continues into next year?

[Dennis Shaughnessy:]

David, it's Dennis. It's picking up pretty broadly, significant pick ups in Asia in investigation, risk assessment and arbitration work sort of generated by the significant increase in the capital flows out there. Significant pickups in FCPA work not only here in the States but also over in Europe. And I think a lot of the retentions that we were getting in related to the financial crisis and especially related to mortgage issues have now matured to where there's some serious litigation going on. We're involved in those, and I think that's one of -- I think we're starting to see the purse strings loosen up a little bit in the Corporate Litigation side, but a lot of these -- the catalyst for them are financial stress. And that's just now I think maturing.

[Dominic DiNapoli:]

David, we're also seeing a lot more investigations in some of the turnaround and restructuring work, particularly outside of the United States where we've got to really search for the assets. So you see there again, having the practices work together in places like Hong Kong and China, it really does allow us to keep the staff at the optimum level by sharing the resources across the practices.

[Dennis Shaughnessy:]

David, one thing to note too on how sort of broad-based this improvement is, is this group had to replace $40 million in revenues that were generated off of two unique and very publicized fraud cases. So not only have they grown year-over-year significantly, they had to replace $40 million that fell off from two cases. So they're having a very, very good year in new engagements and engagements that are maturing into very large operations.

[Jack Dunn:]

Yes, we've seen breadth not only across the world but even the U.S., our new Boston office is not going to cover off the ball. So it does feel like there really has been a turn of events in that area.

[Operator:]

We'll go next to Paul Ginocchio with Deutsche Bank.

[Unidentified Analyst:]

This is actually Alton Garret [ph] on behalf of Paul Ginocchio. And I was looking at your implied fourth quarter guidance, it looks like it's $0.74 to $1.04. That seems a little bit higher relative to recent performance in the industry...

[Dennis Shaughnessy:]

I would say, obviously, we don't give quarterly guidance. But I would basically make this statement for your model building. I would say that short of any kind of extraordinary surprises, an upside or downside, we would expect the fourth quarter to look approximately something like the third quarter. So you would see maybe a slowing in the rate of descent of Corp Fin, but still having the comp record quarters last year. Again, building momentum but not earth-shaking change in one quarter in the other four businesses. So we would look for something approximately the same as this performance short of some surprising events.

[Unidentified Analyst:]

I have a question regarding the Acuity offering. Can you give me like an estimate of the revenue size relating to Acuity or its impact on year-over-year growth?

[Dennis Shaughnessy:]

It's a new product into market. It's been very well-received. We do not break out the individual revenues per product, but it is making an impact. But it's still relatively small as a percentage of the overall Technology revenues. The great news about Acuity is we're seeing now a significant adoption in the second half of the year. So we would anticipate next year, it could in fact be a material contributor to us.

[Jack Dunn:]

And by definition, the area of the market that is attacked are always large cases, not a typically seven figures. And so if it does catch on the way we think it will, it can be a dial mover for us going forward.

[Operator:]

We'll go next to Arnie Ursaner with CJS Securities.

[Arnold Ursaner:]

First bookkeeping question. What was your end-of-quarter share count, please? If you can pick up that number, please? And then more broadly, with the slowing demand environment, I guess I have two questions that relate to that. With demand slowing, are you seeing your even good-quality competitors reacting to some of that by price? Or are you seeing customers, knowing there's a fair amount of capacity out there, pressing you on price? And then as a follow up to that, in terms of Consulting utilization, where obviously do a lot of work. And people that work hard in your organization don't work 40-hour a week, they work substantially more and bills substantially more hours than that. With the slowdown even with headcount in place, is that going to have a pretty meaningful impact? Maybe remind us, if you would, how you think about utilization? You don't do it on a 40-hour week. And whether the slow demand trends are impacting even the existing consultants you have in their billable hours?

[Dennis Shaughnessy:]

I feel like Rodney Dangerfield with that kind of question, and I'm back to school. Go ahead, Dom, if you want to start.

[Dominic DiNapoli:]

I'll start with the pricing. I think last quarter, we start to feel a little bit of pricing pressure, but it does the vary by practice. We're not feeling a lot because in the cases that we get involved in, we are event driven. So it's less price sensitive than if we were just with regular consulting, Strategic Consulting segments. The areas where you feel the total rate down is because of the size of the cases has kind of decreased, particularly in Corporate Finance. So if you got a mega case, you can command probably a larger monthly retainer. In the smaller cases, you just can't get the same level of retainer. Now it's not as much work, but it's not that much less work. So it's not just a matter of reducing the rates. They just look at the size of the case. And they just are not as comfortable with the $200,000 to $250,000 a month retainer. On the positive side is over the years, we've been a lot more successful in getting success fees. So that offsets a lot of the downside in the hourly, which that fluctuates a little bit based upon the input versus the amount of fees that we agreed to on an hourly basis. But at the end of the case, we usually come out significantly on top of an hourly rate.

[Dennis Shaughnessy:]

I think if you look at segment by segment, ECon really has no price sensitivity even though the M&A market fell off in the quarter, the high-end litigation they did such as the Citi case that Jack mentioned and a raft of others they're involved. There's not a lot of price sensitivity there. There's not a lot of price sensitivity in our Regulatory business there, either here or in Europe. In Technology, as we pretty much consistently told you that the price of storage, it's a function of Moore's Law. And each year it does go down, but we've been able to manage through that with increased volumes. The actual offerings, it seems to us have to a certain extent, stabilized. The pricing definitely went down, but it has now seemed to stabilize. In FLC, I think it depends on the market you're in. I would say that there's still a significant price competition, Arnie, in the U.S. in the mid-market, the smaller cases. Again, the bigger, the more complex cases as you can imagine, there's less price sensitivity. But overseas, we're not seeing it. So in Asia, down in Latin America and in Europe, prices seemed not only being stable, but in some of the growth markets there are increasing. And then I think, we've certainly have seen stabilization starting in the beginning of the year of pricing on the retainers in Strategic Communications. And again, not seeing a lot, I think we've seen a contraction in the competitors there. So we actually the market has fewer competitors in it. So I think the pricing has been reasonably stable. So I would say where we would be feeling the most, as Dom said, is in smaller jobs in Restructuring since clearly, that market is returning to sort of a new normal.

[David Bannister:]

The share count, the weighted average shares for the quarter were 46,808, and the shares outstanding at the end of the quarter were 46,427.

[Operator:]

We'll go next to Tobey Sommer with SunTrust.

[Tobey Sommer:]

Two questions. Just wondering if you could describe how your initial thoughts are on planning for hiring heading into 2011, given some of the puts and takes you're experiencing in the segments now? And then, you did have a capital raising, you extended your maturities, and have a decent amount of cash and obviously generated a good amount of cash in the quarter. So wondering about your thoughts regarding the usage of that cash?

[Dennis Shaughnessy:]

Hiring. I would say, clearly, as Dom had said, we have continue to right size. We took severance in the quarter in Corporate Finance as we continued to right size that down to its new demand, the new demand curve in the marketplace for it. I would not see us making across-the-board substantial hires there. But clearly, it's not a homogeneous market. I mean, as Dom was saying, Spain, for example, is really heated up, and I think you'll see us adding people there. Asia is still a very vibrant market for Recovery and Restructuring, so I think you would see us adding there. In Latin America, again, has had a very good year in Restructuring, and you could see us adding there. The U.S. probably, not. We think we're our sort of at the right area there, and that might balance off in all some of the new hires somewhere elsewhere.

[Jack Dunn:]

And with the caveat that the things that are pro cyclical, our Transaction Advisory business, I think you'll see moves there. And our Real Estate and the Valuation business are areas where as the economy swings, should be very good. And we have those housed in Corporate Finance.

[Dennis Shaughnessy:]

I think the use of the fund hasn't changed. We will continue to buy our shares. We will finish out over certainly by the end of, let's say certainly by the next four quarters, which will be the end of our authorization, the remaining $250,000 authorization that we have to purchase our shares, which I think is now think is now down to about $220,000, something like that.

[David Bannister:]

$225 million.

[Dennis Shaughnessy:]

$225 million left. So you'll see us doing that. We're not rushing in, but we'll certainly going to take advantage of opportunities to buy the stock. We are engaged in conversations with companies that will help build us a stronger captive channel distribution internationally, especially Asia and Latin America. We are engaged in conversations with companies who would clearly make us much more muscular in our European operations. And we're engaged in conversations with companies that would increase our domain expertise in other areas. Some of these are fairly sizable companies. It's impossible, Tobey, to predict whether or not we can close these. But I think I'm optimistic that we're going to get some of these done. Clearly, we do have the ability to finance them and use our own cash, and we are very well aware of the negative arbitrage on the books for holding this much cash. So we need to get it to work.

[Operator:]

We'll go next to T.C. Robillard with Signal Hill Capital.

[T. C. Robillard:]

Just following up on the use of cash there. Would you feel comfortable or would you be willing to do multiple acquisitions at the same time or within...

[Dennis Shaughnessy:]

We've done that in the past. We feel very comfortable, especially now. We've really have spent the last three years building out a global infrastructure with support groups in Europe, support groups in Asia, Latin America, and here obviously in the States. It makes it a lot easier to close simultaneously or in quick, sort of layer succession, multiple acquisition because we have teams available to pick up and do the integration fairly quickly and sit to. So we would not hesitate to doing multiple acquisitions and have the resources to do it.

[T. C. Robillard:]

So just go back your comments on guidance, given the increased interest expense and kind of the similar earnings level per your comments, it's implying that you're going to see a sequential uptick in the EBITDA margin. And I'm wondering where you could see some of that. Are you still planning to do some more rightsizing of that headcount side? Is a function of a couple of your pro cyclical business continuing to show incremental margin improvements. If you could just help me there, that would be great.

[Dennis Shaughnessy:]

I think what I was trying to tell you is what we have is we have is a base or we're approaching a base level for Corporate Finance. I think as Jack illustrated, we are actually starting to see some very good growth in the other areas. And we're still seeing decline in Corporate Finance. It really is hinging on where you start to see that floor kicking in on Corporate Finance. We're cautiously optimistic, watching the billable hours now. The utilization in Corporate Finance is starting to move in the right direction. And clearly, the biggest drag on margin is utilization. And it's in pockets, so it's not a nice, deep homogeneous. Some areas in Corporate Finance, utilization is doing extremely well. Others is not good. But we're moving resources around. Some of the areas that are slow are starting to heat up a little bit, so the biggest change in margin will be driven by Corporate Finance stabilizing into sort of a new normal. And as I said, I think we're cautiously optimistic that we're attacking in the right area. Now whether it hits us in the end of fourth quarter or is more of a first quarter phenomenon, we, at least, are starting to see some stability and some consistency in meeting monthly, hourly forecast versus sort of consistently missing them because of business burning off and not being able to replace it. So it's hard, you would think in our business would be the easiest thing to be forecast quarterly. It's actually harder to forecast quarterly because there's so many things that swing in. And in the fourth quarter, remember it's the quarter where we tend to book most of our success fees that are based on a calendar year performance. That can have a meaningful -- the success fees, as you can imagine, a very high margin attached to them because they are post-assignment fees. And depending on how they fall in. If they all fall in fourth quarter, you'll see the margin move. If some of them fall in fourth quarter, some of them fall in the first quarter, you might see the margin move more in the first quarter as a result. So it's a little bit of a timing, and this is a very difficult quarter for us predict.

[T. C. Robillard:]

I guess given your cautious optimism on the base revenue level for the Corporate Finance/Restructuring practice, should we be thinking stability in the headcount sequentially, as you have that optimism? Or do you expect it to continue to prune a little bit there?

[Dominic DiNapoli:]

I'd think stability is probably the best guess at this point. We have been prudent, as Jack and Dennis had said. And I think we're pretty comfortable with the levels of staff that we have now and the level of utilization that we're running certainly towards the end of the third quarter and as we move into the fourth quarter. And with the fourth quarter, you've always got holidays, and that's the wild-card. Thanksgiving and Christmas, they get bigger and bigger every year, it feels like. And the thing that helps us mitigate that in the past is having the large cases like the Lehman Brothers and the General Motors and some of the other large cases that we've had, where we're able to keep people busy, even though as the holidays occur and our staff and our client's staff take time off. So that's the wild card in the fourth quarter, but right now, we're pretty comfortable with the level of people and the utilization that they're running.

[Jack Dunn:]

Yes, we didn't do big production of highlighting certain areas where we again took the time and the expense to clean up our company a little bit. We wrote off a couple of Technology things during the period. We had a couple million dollars of severance. We had the legal fees and things with the acquisition. But I think those things would normalize out, and we think we have a very solid base, especially with the stabilization of Corporate Finance/Restructuring to start to produce the numbers that we like.

[Operator:]

We'll go next to get Dan Leben with Robert W. Baird.

[Daniel Leben:]

Within the Technology segment, could you talk a little bit about the pricing pressure there and the cost up sequentially? You know the revenue was essentially flat from the second quarter, but the EBITDA number dropped by a couple of million?

[Dennis Shaughnessy:]

Well, I think we're doing a good job of cost control. I think clearly, the actual decline in hosting pricing has been more than offset by a big volume surge. So they've been very successful in obtaining new business. I think we're starting to see stabilization of pricing on the actual Technology offerings side. And that doesn't mean we won't see some new guy coming with another way of doing it and try to sort of buy their way into the market. But it does appear to us that the actual sort of severe price competition, while it hasn't gone away, it seems to be getting a little more sensible. we've been very fortunate in having big wins. So going to Dom's point, the larger the transaction, the less price sensitivity, normally because of the risk and value associated with them. And it's also much easier for us to man them and to manage them and, that helps our margin.

[Jack Dunn:]

We've also had a high-class problem in the quarter and that some of our new products obsoleted some of our older ones. And we had about $2.8 million of write-offs of older licenses and things that the Acuity, et cetera are going to make thankfully obsolete and more than make up for that. So that artificially affected the margin there a little bit.

[Operator:]

We'll go next to Joseph Foresi with Janney Montgomery Scott.

[Joseph Foresi:]

First question years on the M&A side. It seems that the number of M&A or acquisition or the amount of acquisition activities picked up a little bit here in the third quarter. Maybe you could just help us try and understand what we see from sort of the amount of acquisitions taking place and what you see in your business? And is it -- how long would there be a lag to see that in your numbers if we were to see that increase rapidly?

[David Bannister:]

It's Dave Bannister. I think the data supports what you're seeing. The third quarter overall M&A activity globally is up somewhat versus the third quarter of last year, about the same as the second quarter. What we saw underneath that, that was not much in the way of strategic acquisitions. So our business is mainly driven by the need to deal with Antitrust concerns and associated Second Request work. We did not see significant acquisitions in the quarter driving that particular need. It is also correct to say that our revenue would trail the announcement of those events in most cases. So it would be the filing of the initial document and so forth with the Department of Justice here and the commission in Europe and then an inquiry that would trail it by anything from a month to three months, I would say. But there really was not a lot of strategic acquisition in the third quarter.

[Joseph Foresi:]

I know your business has got pro cyclical and obviously countercyclical pieces to it. As an outside sort of looking in, in what areas do you see as potential catalysts heading into 2011? And maybe you could talk a little bit about do we need to see a direction in the economy either in the pro cyclical side or a reversion on the countercyclical side to see the net result be positive for you guys?

[Dennis Shaughnessy:]

Clearly, we, everybody always asks us how do we route? We route for our economy. I think you're going to see a stabilization of Corp Fin and the Restructuring side and mainly it has some other elements in it. As we talked about, it tends to be pro cyclical like Transaction Support and some of the real estate work. The capital markets clearly influence us, and M&A influences us. If the capital markets heat up, you'll see significant increases in business on the Strategic Communications side. As the capital markets heat up and that's normally a reflection of events, I think you'll see companies get more testosterone, more aggressive in their civil litigation or maybe get more aggressive in their defense against some of the governmental inquiries that they're facing. I think you'll see more deals, as David said, on the strategic basis. And if valuations get higher in some of the areas, you'll see more harvesting from the private equity guys. And where they're harvesting on a strategic basis, the sale of the company versus our economists would yet get involved in that, and then Technology sort of touches everything. So I would say that two things you need to watch. One, where do we hit the new normal for Corporate Finance because then that's not a drag on the other growth. And then the big outside hyper stimulus for us would be the capital markets and the equity side really open up again and vicariously, you see M&A opening up.

[Dominic DiNapoli:]

We really have the five drivers of our business

[Joseph Foresi:]

Just following up on that and my last question, you talked about the new normal in Corp Fin, it sounded like we're headed there, but we're not there just yet, given what your commentary was in the last quarter. Is that an accurate statement and what should -- have we anniversary-ed that $40 million that you needed to replace in that business?

[Jack Dunn:]

The $40 million was in FLC.

[Dominic DiNapoli:]

And we did replace that.

[Joseph Foresi:]

But are we near that new normal or are we there yet? I'm just trying to get a timeline.

[Dominic DiNapoli:]

I think, first thing, what we need to do normal for the bulk of the practice. There are pieces of the practice that still needs some work. Our healthcare practice, and there's been a change in the number of turnarounds with that opportunities to pitch to. Because a lot of the hospital chains that are struggling, St. Vincent in New York, they closed down. So they're not putting as much into the turnaround as they have in the past. So that's where the big upside in the Healthcare business. And that's why we right sized the healthcare practices and looking at the services and how we can provide those services on a more profitable basis, if in fact the turnaround and the large success fees associated with them are going to be fewer and further between going forward, at least in the near-term. In stimulus packages, there's a lot more Medicaid dollars to go into those facilities to support the struggling ones for a longer period of time.

[Jack Dunn:]

I mean you're seeing a lot of things heat up now I think, for us to have more than a couple of major FCPA cases open up in a quarter is a major turn that things are heating up to see the trade wars that are heightening between Asia and U.S., and Western Europe. I think that's an interesting sign. That ought to bode really well for us. We are seeing case openings for the litigation coming out of the financial crisis, and we're seeing that with a vengeance now. So I think the key that we are seeing the growth in our pro cyclical businesses is real. And I think, Dom, correct me if I'm wrong, but some of which we're seeing in Restructuring, some of the reason we're feeling it stabilize is because some of the kicking the can has come to the end of the road. I think that you can finesse a lot of things but you can't finesse when you don't have the money to make the interest payments. That's when the road stops. And I think we're going to see that. And then typically, as you know, as you followed our company, the end of the year is when you get the financial statements and they have that dreaded third paragraph in there, and then you would have to do something. There are aspects in Europe, whereby I wondered when was the status business going to come? When was the German business going to come? And it's coming now. I think people are -- you have new capital rules in Europe. It's going to make some of that debt for equity swaps harder to do and just replace in your balance sheet casually. So I think time will heal some this, as well as the dramatic change in the cycle of the economy in my opinion.

[Dominic DiNapoli:]

And you did see different sectors struggling and other sectors doing well. Retail is starting to see a little pressure. Our Retail Restructuring practices is starting to gain some momentum. And as Jack said, we see big opportunities overseas, particularly Asia and Latin America.

[Joseph Foresi:]

What percentage of your business is retail? what percentage of your Restructuring practice is retail?

[Dominic DiNapoli:]

We don't break that out. It's not a huge number. And I'd be wrong, if I guessed. Dollar-wise, it's probably $20 million.

[Dennis Shaughnessy:]

Yes, that's about right.

[Operator:]

So the next is Scott Schneeberger with Oppenheimer.

[Scott Schneeberger:]

I just want to pick up in that $40 million of falloff in FLC that you're picking up. I think just in response to the last question, you ticked the main things, FCPA, Asia, U.S. trade wars and then the financial crisis heating up. But could you take us a little deeper into those three, particularly the third one?

[Dennis Shaughnessy:]

Well, I think we were involved in sort of the headline cases that you've been reading about over the last two years as potential cases, they're very real. And you have to sort of go back to the beginnings of a lot of them to the financial crisis, and then follow it through as sort of germinated more and more activity, more and more litigation surrounding a lot of the generators and a lot of the syndicators of a lot of this paper. And so those cases now are really moving into the active areas. And we are engaged in kind of wide variety of those, and they have been a major reason why we've been able to replace the $40 million that was burning off from the two big fraud cases but show the growth that were not now starting to show. The other areas is growth offshore. As Jack said, I mean we are having very good years in Latin America, in our Special Investigations business, in our Political Risk business as well as Asia. So I think when you look at those two, we're starting to see signs that Europe is now -- there's new fraud act that's been passed in the U.K. that has everyone starting to look at their own companies and what do they need to do. We're seeing more FCPA activity not only here, but over in Europe-based companies. So it's pretty much across the board, but some of the largest cases are clearly driven by investor litigation against the very big generators of these securities.

[Jack Dunn:]

And don't forget as what has kept us going through some of this cycle is an advantage we have that some of the other folks don't have, which is our Specialty Practices like IP, insurance, we have a huge healthcare practice. It's not related to turning around hospitals but is helping with monitor ships and investigations and things like that. So it's across-the-board, we have been very busy.

[Scott Schneeberger:]

Just to clarify one thing on that and then a follow up. With regard to these large mortgage situations you're involved in, would you say it's just a few very big one or is it widespread where there's a lot of different litigations coming?

[Dennis Shaughnessy:]

There's a lot of litigations. The targets, you know the concentration in the industry, so the targets have become fewer. But they're bigger targets and, they have a wide variety of issues associated with their consolidations, mergers, purchasers, issuing of securities. So fewer clients because there are fewer clients in that genre to represent, much bigger clients because of consolidation. Much more complexity in the litigation because they've either inherited a lot of it through the acquisitions or in fact have been accused of participating in some of it. So they're big cases, but there's a lot of different aspects to the cases. But fewer actual clients because the clients are just concentrated and consolidated and they're much bigger.

[Scott Schneeberger:]

And the follow up on that is just with regard to the revenue flow there for you, it's been a while since the financial crisis. But it now seems like those issues are coming through ahead. Is it fair to say that we're at the tip of the iceberg? Or has this been running at a level and it's just picking up little bit now?

[Dennis Shaughnessy:]

No. These things tend to run certain courses. You come in and do certain investigations. You prepare for litigation or settlement talks and then depending on how they progress, you move towards some kind of a conclusion. And I would say we're certainly in some of these at the conclusion phase. But in some of them, our new activities where new classes of people feel that they have to try to access legal remediation for something that happened in a securities purchaser investment or things related to this. So it's growing in absolute terms. Some of it I would say we're clearly in the second half of the ball game. Others, were just starting.

[Jack Dunn:]

But if you think back to last time through the cycle, if you think about 2001, 2002, the bankruptcy is in a life-altering event and it's up. And people get hurt. And it's not atypical for the results of that to end up in litigation that you're seeing three years later. If you think back to HealthSouth, if you think back to Enron, if you think back to a number of the cases who grew out of that period, they happened about two or three years later. And we're starting to see, there was a tremendous upheaval. The case that I mentioned earlier was about somebody's expectations based on a 2007 model, not being able to be met in terms of financing. So people got mad, and they went to court about it. So that's what happens. And that's why I think the tip of the iceberg is to grand a metaphor, but I think we're going to see good solid active litigation market here.

[Dennis Shaughnessy:]

I think the biggest change we're seeing from this cycle from the last cycle is clearly a different class of cleanups. This is not something where it's plaintiffs, at straight bar as trying to quickly gather a class, and on a contingency basis, make a quick settlement. These are name brand, top-of-the-line law firms representing name brand, top-of-the-line financial institutions that bought this product. And they are the litigants here. They are plaintiffs, and the defendants are the generators of the products. So does that mean to be more reasonable and settled? Or does that mean that they're better resourced, and they're determined to see some of things through? I think that's a very interesting question. We don't necessarily have the answer on it, but it certainly is a different class of plaintiffs than we had seen in the last cycle.

[Operator:]

And with time for one more question, we'll go to Kevin McVeigh with Macquarie.

[Kevin McVeigh:]

I just wonder if you could talk about the SG&A sequentially. It looked like it was up a little bit. Was there any kind of specific growth initiatives in there, or anything specific that you'd be able to highlight for us?

[Jack Dunn:]

The biggest factor in there would've been the acquisition in Asia. We picked up $7 million of SG&A in connection with that.

[Kevin McVeigh:]

And not to believe in the fourth quarter guidance, but should we assume EPS somewhere around the $0.47 or $0.54 kind of with or without -- I know there's the third quarter charge, but should we think about bottom line closer to the $0.47 or $0.54 for modeling purposes?

[David Bannister:]

I think we've told people and I'll repeat what is that. I think we told people and I'll repeat that. Until we deploy the cash, we're looking at about a $0.04 penalty because of the extra borrowings, even though it's such a low after-tax interest-rate. So it's about $0.04 a share per quarter. And obviously, that will go down each quarter from that $.0.04 number. But assuming no deployment of the cash, it's about a $0.04 negative arbitrage. So you've got to start with that. And then again, I think what we're seeing in the quarter right now is short of things breaking either badly or very favorably, meaning success fees, timing and things like that, we're sort of thinking were in a stabilized floor right now. And we're sort of looking at last quarter and saying, it probably is going to repeat within degrees. So I think that's the best I'm going to give you, but I think it's clearly $0.04, just to be specific. There's a $0.04 negative arbitrage until we start aggressively deploying the cash, which we will be doing. And then we feel that we're probably on a path short of something happening one way or the other to have a repeat of this quarter.

[Operator:]

And I'll turn the call back over to management for closing remarks.

[Jack Dunn:]

Okay, well, I just want to thank everyone again for joining us this morning, and we look forward to speaking with you after our results are in for the year and the first part of next year. Thank you.

[Operator:]

This concludes today's presentation. Thank you for your participation.