FTI Consulting, Inc.
Q2 2013 Earnings Call Transcript

Published: 8 Aug 2013

[Operator:]

Good day, and welcome to the FTI Consulting Second Quarter 2013 Earnings Conference Call. As a reminder, today's call is being recorded. Now for opening remarks and introductions, I would like to turn the conference over to Ms. Mollie Hawkes of FTI Consulting. Please go ahead, ma'am.

[Mollie Hawkes:]

Good morning. Welcome to the FTI Consulting conference call to discuss the company's second quarter 2013 results as reported 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 risks and uncertainties. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, future revenues, future results and performance expectations, plans or intentions related to financial performance, acquisitions, business trends and other information or other matters that are 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 issued this morning, a copy of which is available on our website at www.fticonsulting.com, as well as other disclosures under the heading of risk factors and forward-looking information in our most recent Form 10-K filed with the Securities and Exchange Commission on February 28, 2013, the current report Form 8-K filed with the Securities and Exchange Commission on May 21, 2013, and in our other 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 and will not be updated. During the call, we will discuss certain non-GAAP financial measures, such as adjusted EBITDA, adjusted segment EBITDA, total adjusted segment EBITDA, adjusted earnings per share and adjusted net income. For a discussion of these and other non-GAAP financial measures, as well as our reconciliation of non-GAAP financial measures to the most recently comparable GAAP measures, investors should review the press release we issued this morning. With these formalities out of the way, I would like to turn the call over to Jack Dunn, President and Chief Executive Officer of FTI Consulting. Jack, please go ahead.

[Jack B. Dunn:]

Thank you, Mollie. Welcome, and thank you for joining us today to discuss our second quarter 2013 results and guidance for the remainder of the year. With me on the call are Dennis Shaughnessy, our Chairman; Roger Carlile, our Chief Financial Officer; and David Bannister, our Chairman of North America. This morning we announced our second quarter results, and by now, I hope all of you have had a chance to review them. If not, as Mollie said, they can be found on our website at www.fticonsulting.com. For the quarter, revenues for the company increased 5% year-over-year to $414.6 million. Adjusted earnings per share were $0.58. As we said in the press release, however, the most significant factor affecting the quarter's performance and our reduced guidance for the year was slowing demand for bankruptcy and restructuring work in North America. Record levels of new speculative grade and structured finance offerings and the continuation of the Fed's policy of quantitative easing have resulted in lower-than-expected default rates and demand for bankruptcy and restructuring services. To give this some perspective, during the first half of 2013, approximately $790 billion of speculative-grade loans and high-yield bonds were issued. This compares to $445 billion in the first half of 2012 and $990 billion in all of 2012. In the institutional loan market, a record $385 billion was issued, of which only approximately 25% was new money compared to a historical average of 50%. The vast majority of the funding went to recapitalize and refinance existing transactions as opposed to funding buyouts, mergers or new transactions. All of this refinancing activity and the easy money policy of the Fed have sustained default rates at historically low levels. As we look further into the future, however, the record level of highly levered debt outstanding over the long term should create the potential for significant engagements when interest rates and default rates progress to more normal levels. As a result, we have reduced our guidance for 2013 and now estimate that revenues for 2013 will be between $1.62 billion and $1.65 billion, and adjusted EPS will be between $2.10 and $2.20. Now turning to the results for the quarter. Our Economic Consulting segment continued its excellent performance. Second quarter revenues of $111 million increased 12% year-over-year. Revenues were driven by continued strong demand for our antitrust litigation services in North America and Europe and international arbitration services in Europe. In Corporate Finance/Restructuring, second quarter revenues were $96.7 million. Our recently acquired businesses contributed $13 million in revenues during the quarter. In addition, we saw improved performance in Europe and in our telecommunications, media and technology practice. As we discussed, however, these revenue contributions were offset by weakness in our core North America bankruptcy and restructuring business. In Forensic and Litigation Consulting, second quarter revenues were $105.1 million. This included 12% year-over-year revenue growth in the health solutions practice and strengthened our U.S. financial and enterprise data analytics practice, while demand for North America investigations and trial services practices were soft. Looking forward, we believe the appointment of Mary Jo White as the Chair of the SEC and the formation of the financial recording and audit task force may signal an increased emphasis on enforcement in the future. In technology, revenues of $51.2 million increased 7% year-over-year, even as revenues from large legacy cases continued to burn off. M&A-related second request matters contributed to the increase in the quarter. New matters and unique clients with new matters also increased significantly during the quarter, reflecting the benefit of our increased strategic investments in sales and marketing personnel. As a reminder, though, we have one large matter that is rapidly drawing to a close. The decline of that matter reduced first half revenue by $12 million compared to the prior year and is expected to reduce second half revenues by approximately $20 million. As a consequence, we expect revenue for this segment to decrease somewhat for the back half of the year compared to the first half. During the quarter, Gartner named our Technology segment to the leaders quadrant of its annual Gartner Magic Quadrant for E-Discovery Software report. The strengths cited in Gartner's report are based on client references and are a testament to the quality of our -- of the work of our technology professionals that they perform on a daily basis. Gartner's leader ranking reflects our ability to provide a smart and comprehensive approach that improves the E-Discovery process, contains costs and manages critical enterprise information demand. At Strategic Communications, revenues of $50.6 million increased 8% year-over-year. Our efforts to diversify our offering by building out our public affairs capabilities were evident in second quarter results with the acquisition of the C2 Group, a U.S. public policy group acquired in March of 2013. The group, which focuses on detailed analytics to provide advice to clients, joined us during the quarter and contributed $1.5 million of revenues. Just as importantly, it provided us with entrée to additional opportunities, as clients increasingly seek informed advocacy services in the pursuit of legislative and regulatory outcomes. The remaining revenue growth was largely due to improved project income in North America and in Europe, Middle East and Africa and increased pass-through revenues for certain North America retained engagements. We are pleased that we continue to top the mergermarket M&A lead tables and M&A deal volume globally in the second quarter. According to mergermarket, however, announced deals in the quarter remained depressed. M&A volumes declined 19% year-over-year, and M&A deal values dropped 15% year-over-year. That said, mergermarket also reported that second quarter early-stage M&A activity jumped 14% year-over-year and 24% sequentially, marking the biggest quarterly boost that mergermarket has witnessed since it started tracking early-stage M&A 5 years ago. In our Economic Consulting segment, we have also begun to feel increased M&A activity. And as noted, Technology saw a nice increase in second request work. If these factors indeed combine to signal a positive trend in M&A activity, that would be a very positive development benefiting our entire company. From a geographic perspective, Asia-Pacific revenue increased 28% year-over-year. The increase was largely driven by revenue contributions from the acquired businesses we mentioned in Australia, as this region continues to gain broader strategic significance to our firm. Our expanded network in Australia promotes increased synergies with our already established businesses there. And we have now offices in 5 cities, 4 established segment leaders and 244 employees there. Forensic and Litigation Consulting also contributed to year-over-year revenue growth, with a 10% year-over-year increase, driven by growth in our construction solutions and global risk and investigation practices. In EMEA, revenues increased 16% year-over-year. Revenue increases were driven by year-over-year increases in our Economic Consulting, Corporate Finance/Restructuring and Technology segments. Our Economic Consulting revenues improved 35% year-over-year, and margins are approaching those achieved in the U.S. Economic Consulting benefited from the strength of our European international arbitration practice, as our London-based ECON consulting professionals were highly utilized during the quarter. We also saw up an uptick in demand for Europe-based energy engagements during the quarter. In Corporate Finance/Restructuring, we benefited from several large engagements in our U.K. restructuring practice, resulting in year-over-year revenue and adjusted EBITDA improvements. In North America, revenues increased 1% year-over-year. This increase was driven by continued strength in our Economic Consulting. But as noted, these increases were offset by revenue declines in our North American bankruptcy and restructuring and our U.S. investigations practices. In Latin America, revenues declined 14% year-over-year. The declines in Corporate Finance and Restructuring more than offset good trends that we saw in Brazil and Mexico. With that brief overview, I will now turn it over to Roger to provide more color on the quarter. Roger?

[Roger D. Carlile:]

Thank you, Jack. As mentioned in our press release, our results included 2 noncash items, which had an offsetting effect on our adjusted EPS and increased our adjusted EBITDA by $4.1 million as compared to the prior year quarter. The first is a revaluation gain resulting from the revaluation of an acquisition-related contingent consideration liability, commonly referred to as an earnout liability. The reduction of this liability was recorded as income and is included with the acquisition-related contingent consideration line in our condensed consolidated statements of comprehensive income. This revaluation gain increased adjusted EBITDA for the quarter by $8.2 million, increasing adjusted segment EBITDA of the Corporate Finance/Restructuring segment by $6.3 million and the adjusted segment EBITDA of the Forensic and Litigation Consulting segment by $1.9 million. It also increased EPS and adjusted EPS for the quarter by $0.18. The second quarter of 2012 also included a similar revaluation gain, which increased adjusted EBITDA by $4.1 million in that quarter, increasing Corporate Finance/Restructuring segment's adjusted segment EBITDA by $3.8 million and adjusted segment EBITDA for the Forensic and Litigation Consulting segment by $300,000 and it increased EPS -- adjusted EPS for the prior year quarter by $0.08. The second noncash item was a valuation reserve of $6.9 million, which was recorded to reduce the deferred tax asset related to foreign tax credits, which, based on the current assessment, may not be realizable in the future. This reserve is based on future estimates of foreign-sourced income that's recorded as an increase in income tax expense for the quarter. This item reduced both EPS and adjusted EPS in the quarter by $0.17. Finally, to update our guidance on cash flows. We currently expect our cash from operations for 2013 to be between $200 million and $225 million and for our capital expenditures for the year to be between $42 million and $47 million. The $10 million increase above our previous capital expenditure guidance was primarily to changed structure and timing of payments related to the finish-out of our new London office, which is expected to be occupied early next year. With that, I'll turn the call back to you, Jack.

[Jack B. Dunn:]

All right. With that, we'll turn it over for your questions.

[Operator:]

[Operator Instructions] Our first question, we'll hear from Kevin McVeigh with Macquarie.

[Kevin D. McVeigh:]

I wonder if you could give us a sense on the Economic Consulting side, given the pickup in capital markets, I would have thought we would have seen a little more of an uptick there. Is -- any kind of just thoughts on the back half of the year, whether that could offset some of the [indiscernible] we're seeing on the Corporate Finance/Restructuring side?

[Dennis J. Shaughnessy:]

Okay, it's Dennis, Kevin. They're already, obviously, producing significant year-over-year gains. And I think that we have a lot of retentions in M&A, which are influenced by capital markets. And we have a lot of retentions in complex litigation and have gotten some very potentially large ones recently of sort of front page news cases that you guys have been reading about. They would have the influence, depending on how these cases take off, to move that number upwards. So you do have some upward possible expansion of that second quarter -- I'm sorry, second half forecast for ECON. On the other hand, remember, they already are producing an excellent year, double-digit growth, and so I think we have to be a little careful about expecting too much more out of that. But that would be one area where we would have upside leverage.

[Kevin D. McVeigh:]

Got it. And then just on the Corporate Finance/Restructuring, any sense -- are we kind of in a new range of margins for that business just given -- obviously, with the Fed easy money or -- as that starts to run off, is that something that we think snaps back sooner rather than later in the States? And then just any thoughts on that business in Europe as well. Is Europe starting to feel a little better, and that is part of the reason for the adjustment to the guidance or was it primarily U.S. at this point and we'll see the way Europe plays out over the balance of the year?

[David G. Bannister:]

It's Dave Bannister. Let me try and give you a little more color on how we got to where we are there and see if that helps answer your question. Like many companies, we start building our budgets in the fall of the year. And last fall, default rates in the U.S., according to S&P, were going from an average in the year of 2% to 2.5%, up to 3% by September last year. Remember, the long-term average of those default rates is around 4.5%, so not a robust market but an apparently improving market. More importantly, the S&P was forecasting forward level default rates of about 3.7%. So in putting together our budgets and eventually our guidance, we assumed the level of around 3%, which is where it was when we prepared the budgets and pretty significantly below what S&P was projecting. In fact, what we've experienced this year is levels of around 2.5% through the year, so a full almost 20% below what we had expected and probably almost 40% below what S&P was expecting. So it has clearly been a much slower market than we expected during the year. And you can see the consequence that -- of that in a number of our numbers. So for example, you'll see the revenue proportion of that business is down about 20%. Folks are scrambling to get work. Pricing becomes more challenging, as there is capacity chasing the few deals that are getting done. But as Jack pointed out in his comments, we recognize there was a massive amount of refinancing and a massive amount of new issuance in high-yield or speculative grade debt, that as things regress to the norm, should eventually provide backlog for us. We don't know when that can change. We don't know when the Fed may start slowing down the quantitative easing, but things generally work back to more normalized levels. So we're not believing this is a business that's permanently injured but rather one that is operating at very, very low levels of demand and is working hard to get the work they can do. So Dennis or Jack, do you want to elaborate on that?

[Dennis J. Shaughnessy:]

Well, I think specifically on your question, the problem is in North America. In Europe, we're having an excellent year. We had some new -- very good new business acquisitions. And we actually made a conscious decision to make an investment to even expand and beef up our transactional support group over there. We have been able to attract from the top talent from one of the accounting firms there. That will be an investment that will look like a $0.07 to $0.08 investment this year because of, obviously, restrictions on when they can begin to work and start paying. But we felt so strongly about the potential in the individuals and the opportunity to get them that even in a slow year for corporate finance globally, we decided to make this investment. And so that $0.07, clearly, is part of the penalty that we're going to incur in the second half and brought our guidance down. But far and away, the bulk of the problem is in North America. And you've been reading about several major retailers and the fact that they have had serious operational sales problems. There was lots of speculation about what would happen to them, were they going to have to formally restructure, we anticipated significant assignments in some of those. On the other hand, they were able to receive increased financing. And we'll just have to see whether they'll operate -- whether that bought them enough time to change their operations or whether they'll have to, in fact, engage in a formal restructuring, in which case, they would be very large assignments, and we would expect, as we normally would, to participate in those. But the problems in North America, you're right, the business that you're getting right now, that's smaller, obviously, has lower margins. It's more complex as far as manning, and you simply don't have the ability to get to streamline margins that you do. And then you have to be realistic about your costs. I think we're trying -- we're assessing what our personnel complement needs to be in view of this demand curve. We're making adjustments to that as we speak. And I think on the other hand, these practices are built for the long term as the company is, and you certainly aren't going to do anything radical because we're in -- granted a historical lull as far as default rates, as David said. So the problem, specifically, is in North America. We're on budget in Australia, we look very strong in Singapore, and we anticipate a stronger second half in Latin America and in restructuring. And in Europe, as we said, with the exception of the penalty that we consciously agreed to make in the investment on the transaction support guys, they will have a good year. It really resides in North America, and I think that we just have to be cautious. And we're trying to give you the best flavor we can of what we see in the second half.

[Kevin D. McVeigh:]

That's helpful. And then just one more, if I could. Is it a scenario where some associates from North America can be redeployed to Europe from a utilization perspective longer-term? Do they have similar skill sets or is it pretty siloed from a consultant perspective?

[Jack B. Dunn:]

It's not that easy. It sounds easy. And people who have certain industry expertise, obviously, they move around. But then you have to have matching language skills and things like that. The rules and everything in Europe are statutorily significantly different than over here, so while your general expertise of analysts help, it's just very, very expensive to do it that way. And so I think the challenge is more to get the personnel complement aligned right for our expectations here in North America and grow in situ the other parts of the world that seemed to have a little more tailwind.

[Operator:]

And next we'll move to Joseph Foresi with Janney Montgomery Scott.

[Joseph D. Foresi:]

Just take a little bit time here and help us understand the new guide by service line. I think you had mentioned that $0.07 is coming from an investment, but are we taking down restructuring and technology? How are we thinking about the run rates of the individual businesses in the new guidance?

[Roger D. Carlile:]

Yes, Joe, it's Roger Carlile. I think when you look at the guidance versus -- as David mentioned earlier, if you look at the guidance versus where we were, the guidance we gave at the beginning of the year, the real change is the Corporate Finance/Restructuring segment. It was mentioned that the real impact there is in North America. If you look at the other businesses, they generally, as we said, Economic Consulting is performing strongly, a little bit better than we expected. Technology in the first half of the year was performing better than we expected because we were forecasting a bit more severe burn-off of some of those legacy cases that we mentioned. Strat Comm is doing about as we thought, and FLC is doing a shade less than we thought at that time. So I think, really, when you look going forward, that's all, I think, in our forecast fairly stable in those regards, other than the comments about Tech, where we think the back half of the year could still be down from the first half of the year because of the legacy case burn-off. And the real change is attributed to Corporate Finance/Restructuring coming in below. As you can see from those numbers, essentially, the acquired revenue was fully offset by the miss in North America. So I think that's the issue we're facing as we look forward.

[Joseph D. Foresi:]

Got it. But I mean, if you look at the sort of the numbers here, is it a balance between Tech and Corp Fin? But it sounds like you're saying that most of it is coming from Corp Fin because that's a pretty considerable drop that you're expecting in that business in the back half of the year. So I'm just trying to make sure that I balance it out as I look at the numbers.

[Roger D. Carlile:]

Yes, I think you can think of it being primarily Corp Fin but a little bit of Tech down in the back half compared to the first half.

[Dennis J. Shaughnessy:]

Tech, actually, it's probably had one of the best new business halves that they've had in 3 or 4 years. It's just the 2 assignments that are burning off and will end literally as we speak now and over the next 120 days. We're so huge that they're just having to replace a big hole. They're being successful in doing it, but it makes us reluctant to forecast that they could beat the year's projections. So they most likely will be somewhat down in the second half based simply on timing. But the new business side of it actually looks extremely good.

[Joseph D. Foresi:]

Got it. You've seen the ebbs and flows for, I guess, probably a number of different years in the restructuring business. How quickly can business come back there from an interest rate perspective? And let's assume that we stay at this level or near this level for an extended period of time, what are the catalysts you see in the business that could maybe compensate for it -- not improve it?

[Dennis J. Shaughnessy:]

I'll start. I mean, if we stay at this level for an extended period of time, it says that you have probably replaced maybe some artificial funding from the Fed and sort of aggressive management of the capital markets with real solid economic growth. If you have real solid economic growth, we know the companies have historically high liquidity on their balance sheets, their stocks have returned to more favorable valuations. I think -- but there's not a lot of external organic growth. So you're going to see M&A, and you're going to see capital markets work. So the company -- everybody asks us, how do you bet long term? Well, we would rather bet for robust economies and robust capital markets. We would benefit much more if restructuring longer-term paid down because of tailwinds coming out of frothier economic news. So I think something has to give. You're either going to see sort of this artificially managed cost of funds that we have. And it'll start to release, and we'll return to something more akin to probably default rates that we were used to over time, now whether it hops back to 4%. But you talked about how quickly, it only takes 2 or 3 major companies that you guys have been reading about struggling and having bad operational problems to have to file. And if that's the case, these assignments, as we've seen from large assignments that we've had in the past, can be extremely big. And they start off quickly, and the actual first year tends to be the most intense because of the amount of time that you put on it. So it can turn very quickly. Forecasting that is dangerous, especially in view of the fact that, again, the supposed experts in this have missed it so badly in the rating agencies, and we certainly haven't been much better. But I think it's really a dual track. If it stays the way it is for a prolonged period of time, the driver of that has to be good economic news, and we have huge upside there in our businesses. If it doesn't stay that way, it can then swing quickly, and we would be a major beneficiary of that.

[Joseph D. Foresi:]

Okay. And then maybe you can give us some idea of what the size of your healthcare practice is now and what vertical that's in and some of the resources that you're devoting to that?

[Jack B. Dunn:]

Yes, as you know, we realigned that business in a way that we could -- we thought we could take it to market more successfully. So we -- earlier this year, we took groups that were already working together but not sort of administratively or managerially going to market together out of our Corporate Finance and FLC businesses and brought those together. And it's fully reported within the Forensic and Litigation Consulting segment now. That practice is running in the range of $100 million a year. It's growing at double-digit rates, around 12% in this quarter. But I think you'll see that growth rate pick up as they are able to get sort of -- the kinks worked out of being together and having their unified go-to-market strategies. So I think we're very excited about where that business is and where it's headed.

[David G. Bannister:]

I'll add a little bit there too. Our challenge there, really, is recruiting enough headcount. So that one is one where we had business, we had work to do, and we're challenged and actively out looking for folks to add to that business. It doesn't require more specialized skill sets, they're not ubiquitous, you can't simply move people into it. We actually have physicians and clinicians and so forth in that practice doing work inside of hospitals, but we think there's very -- as other companies have reported, we were seeing very strong demand in that area.

[Operator:]

And next, we'll move to Tim McHugh with William Blair & Company.

[Timothy McHugh:]

First, I just want to ask about the Technology segment. The $20 million, is that relative to the first half of the year or is that -- was that a year-over-year comparison?

[Dennis J. Shaughnessy:]

That's year-over-year.

[Timothy McHugh:]

Okay. And I guess, factoring that in, where would we sit as we get to the end of 2013 with those large cases? Could you -- I guess that's the question?

[Dennis J. Shaughnessy:]

Yes, one of them has extinguished to the point of insignificance. The other one will stop to the point of non-materiality. So we have relationships with both of the companies. And it doesn't mean we won't continue to do business, but nothing like we experienced because both of the issues have finally settled. So you might see something, Tim. You might see something like $1 million, $1.5 million-a-month relationships with people that just simply are ongoing type of relationships but nothing like we experienced in the past. So the difference year-over-year in the second half is about $20 million, and the difference year-over-year in the first half was about $13 million. And in all honesty, we thought that would end somewhat sooner. So the first half benefited from some follow-on work we had to do in wrapping up some of these.

[Timothy McHugh:]

So it may still be a year-over-year drag in the early part of '14, but if we looked at the quarterly run rate towards the end of '13, that should be closer to a kind of post -- post those large cases, a steady state?

[Dennis J. Shaughnessy:]

Correct. That's a good way of putting it. You still have revenue in the first 2 quarters from predominantly one of the relationships. And so that would -- you would be lapping that, obviously, at a much lower level than we're lapping it first half of this year. But it will end as far as being a material impact on the results predominantly third quarter for sure and the fourth quarter.

[Timothy McHugh:]

And I guess you talked about some strong new business and, I guess, specifically sounds around second requests. I know those can be lumpy, but what is your -- excluding those large cases, is the outlook improved? Do you feel better about that given the new case wins and, I guess, the sustainability of the second requests were.

[David G. Bannister:]

Yes, Tim, it's Dave. In the quarter, we had about approximately 28% growth, if you ignore the effect of that one big case. So we're very bullish on the new business efforts in that area. It's not just second requests. That growth also was in existing areas, such as financial services and financial institutions, and significant business there, legacy relationship with large pharmaceutical companies and other sorts of matters. So it's -- I would say the -- what we're most excited about is between the reemergence in the Magic Quadrant of our -- the totality of our practice and the recognition of our peers and our customers of how well we're doing in terms of providing service there, the Gartner report and the release of Ringtail 8.3, which has really gotten us in the game and in fact ahead of the game in terms of the way clients and users of the products interact with the underlying robust technology. We're pretty encouraged about our ability to keep winning business there and working on important matters. But what's really gratifying is we had those kinds of growth numbers in the first quarter, despite that very heavy lapping of -- very important piece of business, one we're not going to apologize for, but really a lot of hard work to drive a 28% growth rate away from that one engagement. So I think that's a testament to how well that product is working and those people are working.

[Timothy McHugh:]

Okay. And I guess just on the restructuring side, are you seeing the business actually kind of trend down sequentially? Or is it -- did you -- I'm trying to understand, did you expect it to pick up as the year progressed and you're just not seeing the pickup? I guess I'm trying to understand, is it getting weaker or it's just not picking up the way you thought it was going to?

[Dennis J. Shaughnessy:]

Yes to both questions. I think, number one, there were some relationships we had that probably ended faster than we thought. So they might have thought that they had longer runway to replace them, so that's just an absolute trend down. And number two, it's the big assignments. We simply aren't seeing the big assignments because the companies that are large and have the most operational issues also have the most access to capital right now. So we are seeing a definite trend in defaults that is not coming back anywhere near historical trend lines. And clearly, from what we hear from our peers in the market, they're witnessing the same thing. So I think you could see from bankruptcy filings, there had been very few big bankruptcy filings. And again, I think that is why we adjusted the second half as much as we've adjusted it because we simply don't -- we just don't see the business there right now, although it can, obviously, snap back quickly in that area.

[Roger D. Carlile:]

Tim, it's Roger. I think if you look at the press release and think about that we acquire -- businesses have been very successful to us are important markets in that segment in both Australia and in our valuation of financial advisory services group, but that's $13 million of revenue, and we are essentially flat. So that $13 million of organic decline, which is primarily in North America, that shows you the level of impact of just going down from where we were, even if we had planned for the rest of the year to be flat.

[Operator:]

And we'll move on to David Gold with Sidoti.

[David Gold:]

Just a little bit of follow-up on changes at the SEC and sort of how that affects us. I think if we look at the landscape, it seems to be playing out pretty closely along the lines of what you expected if we go back a year or so ago with change in leadership, reramp in lieutenants. But a lot of that is now in position, from what we can tell. So just wanted to get a sense for thinking there as to how long it may take for that to ramp up a little more and maybe more meaningfully enough for us to see some benefit at FLC.

[Dennis J. Shaughnessy:]

Well, we would be benefiting in FLC and in ECON because, obviously, FLC on the investigative side, support side, and then ECON often on the damage, expert test, volume side. The -- we are feeling the benefit of that changeover as we speak. And so we have been retained in some very notable cases that have been launched recently or announced recently or at least come to sort of a more combative position recently. And I think our feeling is that it is a priority in the latter part of this administration's term, that they do want to show success in prosecuting what they feel are excesses. And so we would expect that we and others will benefit from increased, say, lack of settlement, more of a pugnacious attitude, taking it to trial, trying to get criminal verdicts, David, as well as civil. So I think they're going for things now that obviously start to argue that people have big fights on their hands or that they're fighting, in some cases, for their -- for institutional lives. So those are obviously ones that tend to involve a lot of work from people like ourselves.

[Roger D. Carlile:]

David, it's Roger. I think, for that -- for the FLC business, it's been a while. You've heard us talk for 12 months to 18 months probably about the depressed SEC activity heading into the elections and how we thought things could change once you had -- you got past the election, you had a new Chair for the SEC named, and I think you're seeing that. I think other things around the world are positive. So I mean, it remains to be seen how it all plays out for us as we go forward. But the trends for the Forensic and Litigation Consulting business, particularly in sort of the forensic investigation side, I think, are as positive as they have been in a while. You've heard Jack joke in the past about whether integrity has broken out in all places around the world, but the appearance of integrity may be breaking out in some places of the world because you had, again, today the second announcement of the Chinese government looking at bribery allegations for another foreign pharmaceutical. And so I think, as you look around the world, it seems to be that the companies are coming around to -- I think you'll see more of the FCPA, the bribery investigations. You have the SEC talking about getting back to their financial reporting task force and investigations teams. So I think -- well, again, it remains to be seen how it plays out, but those are some things that haven't been happening in the marketplace for that business for a while.

[David Gold:]

Got you. Okay, fair enough. And then one other, when we think about the adjustments in guidance and we think about top line reduction versus bottom line, you called out $0.07 for investment in Europe. But I guess, more broadly, should we think about the rest of the variances, just negative operating leverage? And also with that, are there cost adjustments that you might be able to make in the next few months?

[Dennis J. Shaughnessy:]

Well, clearly, we're looking hard at all costs across the whole company. I think, David, I mean, it sounds like a cliche, but I mean, most of the issue, the issue is not revenue, it's about mix. And you can see the revenues are reduced that much because we're replacing revenue in other areas. But unfortunately, the revenue that's replacing it does not have traditionally -- our highest consulting margin is in restructuring. And so you are replacing maybe at the margin, the 30%-plus type of contribution with businesses -- we'll just pick economics, which traditionally has been around a 20% margin business, with robust growth by economics. But that's 10 margin points as you trade $1 for another. So I think that the issue isn't so much the revenue line. As I said, we didn't adjust it that much. The issue really is the mix. And so you're seeing we anticipate growth in the second half in ECON. We anticipate -- actually, we have good tailwinds we're seeing now behind Strat Comm. They have a stronger second half. The view of -- we finally had our first really good contentious M&A fight that we were involved in here in the States. And the capital markets in London have opened up, and there are capital transactions, and obviously, given our market share there we'll benefit for that. So again, they tend to be a lower margin business, so you're seeing ECON have strong -- you're seeing that move up. And then again, I think the margin trade-off on Tech is just simply where you have one of your biggest relationships, it's easier to manage it, it's easier to man it, you tend to make more margins on, even though pricing is the same, than a lot -- than say a basket of smaller ones, where you might have the same pricing, but it just is going to be more difficult to service it and get the margins. So you're seeing some margin erosion there in the second half because you're replacing one giant job that was extremely profitable because of our ability to manage it with a whole series of smaller ones. And so again, it's not a revenue issue as much as it is a mix issue.

[Jack B. Dunn:]

And I think, Dennis, to add to you, it's not just the mix of bigger jobs, smaller jobs, but for example, in Corporate Finance, and as David mentioned, working hard to generate that revenue, a lot of that revenue is now non-distressed or less distressed types of services. They don't carry quite the same margins that a project does that's in bankruptcy or restructuring. So the revenue -- you have a mix of the revenue that impacts margin as well.

[Operator:]

And we'll move on to Randy Reece with Avondale Partners.

[Randle G. Reece:]

I just wanted to get clear, or clearer for me, what your expectations were for headwinds on large multi-year projects. When you put together guidance entering the year, what's changed on that? And what has changed otherwise since you gave original guidance?

[David G. Bannister:]

It's Dave Bannister, Randy. We do not have significant changes in our expectations around large multi-year engagements that were existing at the time. I would say the difference is, for example, within Corporate Finance, typically in any given year, 25% to 40% of the revenue is comprised by their 4 to 10 largest projects. We simply do not have any new large projects going on in that business. A lot of this is public information. You can go and look at the filings of our fees -- fee apps [ph] like Lehman Brothers, and we'll see annual revenues of $50 million or something for engagements like that. Right now, I think our largest engagements in that segment are probably below $5 million a year in terms of revenue. So it's not that our -- that we misunderstood what's going on with X-10 [ph], a large engagement, but rather that they are to book new engagements of that level, since the run-off in technology is actually somewhat better or slower or the revenues continue longer than we thought with respect to a couple of [indiscernible] but not in a particularly material sense. The biggest factor is -- and again, I tried to say this earlier -- when we put together our budgets and put together our guidance, we were looking -- S&P was looking for somewhere around 3.4 to 3.74 default rates. We used 3. In fact, we're running at about 2.5, and that would represent a 20% to 25% shortfall in revenue. If you made it as simple as that, it would be $0.50 a share roughly in earnings, and that's really the difference

[Randle G. Reece:]

Very good. That helps me understand how you set expectations for winning new business. With the businesses that you acquired over the last 12 months outside the U.S. for Corporate Finance/Restructuring, how have those been performing?

[Dennis J. Shaughnessy:]

The businesses -- Randy, it's Dennis. The businesses in Australia are on budget or exceeding budget. The -- and those have been the 2 main acquisitions, the acquisition we bought in the valuation business here in the States is running ahead of budget. So of the 3 most recent ones, which will be in the last 18 months, we're pleased with the results of all 3.

[Randle G. Reece:]

You're obviously not alone in what you're experiencing. Do you have any desire to pursue acquisitions of maybe beaten-up properties at this time? Or are you going to sit back and try to figure out the direction of the market?

[Dennis J. Shaughnessy:]

Well, no. I mean, I think the one thing we can all bet on is the market will come back. The question simply is timing. I think we'd be foolish, given the balance that the company has and the amount of cash flow, not to look at properties, especially that are -- have a lot of industry expertise that can bring unique, long-term professional expertise to us. And I think that, clearly, a lot of the smaller companies are experiencing significant pressure in this area. And we actually talked last night about several -- that during the last restructuring would have been viewed as rock stars in their industries. And yet, we know they're having some significant headwind issues. Given the fact that they're smaller practices, they tend to be more concentrated in certain industries, and some of the businesses there. So we would be on the lookout. We wouldn't be afraid to pull the trigger. You've got to build these companies for long-term prospects.

[David G. Bannister:]

And if you look at the things we've done over the last couple years, one of the real benefits we've seen is the ability to leverage our global platform and our different skills against those additions, so there's growth of our partnership, as I like to say. So, for example, our valuation business that we added in Southern California has extended itself very effectively across the entire platform of our relationships in the U.S. with financial institutions, with major pension fund managers and bringing some skills to bear, where we have X-10 [ph] relationships that we can use and lever. Similarly, the -- what we call the C2 acquisition. The government policy analytics group in Washington has very quickly been able to help a number of our clients in monitoring, analyzing and predicting actions that are going to go on in Washington. So those are the sorts of things we're looking for, where can we add people or capabilities or capacities that lever on existing relationships, not just buying things cheap because they're beat up.

[Dennis J. Shaughnessy:]

And I think to add to that -- to David's comment, I think things that drive value, they align well with the global trends. So industries like energy and insurance, continue to grow, and healthcare, I think you see a lot of growth in those because those are global trends that are affecting those industries. And we make -- historically make a lot of money dealing with industries that are going through transitions, whether strategic, capital or otherwise.

[Operator:]

And we'll move on to Tobey Sommer with SunTrust.

[Tobey Sommer:]

Just a numerical question. Within the Corporate Finance/Restructuring segment, how big is the North American restructuring piece of that revenue in the back half of the year?

[David G. Bannister:]

It's about $200 million of the $400 million on an annualized basis, Tobey. And so in the back half -- I don't actually have the number off the top of my head for the back half of the year, but it's running below that level. So if we did $100 million in the most -- in the quarter we just finished, $13 million from acquired businesses would leave $87 million, so it's -- we probably would think it should be $200 million, and it's probably running more like $160 million or about $80 million for the back half of the year, so around those sorts of numbers. We'll give you a better answer on that.

[Tobey Sommer:]

Okay. No, that's helpful. I wanted to get a sense for the mix issue because it seems like part of what you're being confronted with is lower demand but then also a dearth of large projects that generally carry high margin. Have you experienced, in your management of the business historically, a sustained stretch, where large projects have simply not materialized? Or is this unusual in something, whether it's a massive product recall or some sort of restructuring out of the blue is likely to occur in any stretch of 2, 3, 4 quarters?

[Dennis J. Shaughnessy:]

Well, it's a good question. I'll start off. I mean, I think, certainly, there have been troughs -- restructuring is a cyclical business. Certainly, there have been troughs. I would say no one has experienced capital costs as low as they are and probably access to capital right now as easy as it is for at least a certain breed of companies. So that overlay, Tobey, I think, is unique against prior sort of duration of what we would call troughs in the restructuring market. Now does that argue that you're going to have an even bigger robust market as some of this just doesn't work out? You could make that case. But you can also make a case, and that's why we've taken the second half down, that the government seems pretty intent on keeping that cost of funds where it is and keeping demand for certain products flush so that there's a lot of liquidity in the market. And so I think we may be certainly sitting here for 2 to 3, 4 more quarters, watching the markets continue to add liquidity to troubled companies in an effort to buy them more time to fix their problems. Now whether they're successful or not, we don't know. And yes, the whole issue of municipalities and how they're going to be responding to some of these things going forward without federal aid is also subject to a big debate. But I think we have seen these troughs. They have tended not to last so long. But then again, we haven't had this overlay of cost of funds and liquidity that we've experienced in the last 48 months.

[Jack B. Dunn:]

Yes, the -- historically, in the first quarter, I think, of 2003, we saw an explosion in high-yield debt, that basically, at the time, we said probably affected 85% of the companies that we had in backlog or that we had as opportunities. That resulted in -- and I think there are 2 things that are maybe -- one is unprecedented, which is certainly the quantitative easing. That's a wildcard that we haven't dealt with before, as Dennis said. The second is this trend of the money here going into refinance deals as opposed to into new money deals. And in 2003, what happened was the first quarter explosion in a high-yield debt had the effect of basically costing us some backlog in larger transactions. And the result was not that companies then defaulted to next year, but it was that, that had been morphed into frothy lending. And so we had a relatively good period of economic activity, and we were very, very busy because, as we've said time and again, we tend to do pretty well both in periods of high exuberance and in periods of bad results. But when there's kind of just an on leak [ph] going on, that's not our favored milieu. So I think we -- to answer your question, certainly, for the rest of this year, you would think that, that would -- they'd probably taking care of a lot of the problems that we see out there that would have normally been opportunities for us.

[Tobey Sommer:]

Is -- to your back half guidance, does that include any cost cuts that you may consider in the future?

[Dennis J. Shaughnessy:]

It would not include special charge, and we certainly will be making cost cuts. So I would say that -- the answer to your question, it does not -- it basically would include adjustments we have made at the end of the second quarter and then estimates of actions that we will take in the third and fourth quarter.

[Tobey Sommer:]

So it doesn't bed your estimates, I should say. Okay. In terms of early-stage M&A, you've had a well-performing economic practice and talked about being set up on retainer. Could you describe within that mix of early-stage stuff that you're involved in, the size and scope? Are there potential large projects that could come that way into the business that would feed multiple segments and maybe help offset the core mix of business that you've got so far?

[Dennis J. Shaughnessy:]

Well, yes. Yes, I mean, I think they're very large assign -- potential assignments. They would predominantly benefit economics because they have been retained and we have been doing the work to get the deals approved. There's some very large competition assignments that are actually governmentally generated antitrust or anti-competition inquiries, which, again, would predominantly benefit economics. The Technology group, as we said, has started to see an increase in second requests. And clearly, if there is aggressive prosecution of some of these governmental-initiated competition issues, you're going to need data management and things like that. So that could spill over into Tech. But I would say, the group that would predominantly benefit if some of these large deals actually activate and you have to get governmental permission would be ECON.

[Tobey Sommer:]

My last question is in Strategic Communications, kind of a nice sequential uptick in revenue there, but I would have thought, perhaps, a little bit more margin flow-through. Can you describe what you're seeing in the business there?

[David G. Bannister:]

The revenue increase included a relatively larger percentage of pass-through revenues, which had relatively low margins. So I'd be a little bit careful on looking at the revenue increase as being sustainable. We are, from time to time, asked to do things for clients in terms of booking events and so forth and so on. They're random. They're not particularly profit making, they're rather pass-through revenues. But that having been said, there certainly are a number of trends in that business that would suggest that revenue and demand are improving, an uptick in capital markets or M&A activity, we've spoken about many times, but similarly active -- a more active regulatory or perception of regulatory environment, where people need to get things done in Washington or Brussels, [indiscernible] for that business. And I think we are seeing some increased project revenue or activity level around traditional investor relations, public relations kind of activities. Again, I mentioned earlier the C2 acquisition, and I would reinforce that again. Even though it's a very small business in of itself, its skills are leverageable and importantly leverageable against things that major companies need to do. Roger mentioned earlier, for example, the energy space. You've heard us speak in the past about the work we've done for the energy industry, particularly around frac-ing that has lots of issues that are significant to it, in terms of the clients' needs to be persuasive to push forward projects for new wells, for new activity around that, for increasing both regulators, legislators and even the general populations understanding of the risks and opportunities for rewards from frac-ing. That's a pretty significant area. Our energy business, now it's running, Roger, what, $50 million a quarter or something like that?

[Roger D. Carlile:]

Yes, I think all combined for all 3.

[David G. Bannister:]

It's a very -- it's something we haven't, again, haven't started talking about a lot yet, but it's an area where we have pretty high hopes for doing some things there. And it sort of wonders that line that we try to erase between government policy, public affairs, public relations, economic analysis and industrial development. So we're pretty excited about that area. We're not going to bang the drums too loud yet. We have got some work to do, but it's one of those areas where 5 years from now, we think we might have a pretty big business.

[Jack B. Dunn:]

Yes, because of our geographic advantage, the government affairs business is really one that we want to concentrate on and add to over the coming years.

[Operator:]

And next we'll move to Ato Garrett with Deutsche Bank.

[Paul Ginocchio:]

It's Paul Ginocchio. Just 2 questions. First, on the guidance. At the midpoint of the revenue guidance, your second half revenues look like they would be down about $9 million versus the first half. But even taking out that Corp Fin investment of $4.5 million pretax, that your costs in the second half at the midpoint again looks like they're going to be up $2 million. So I'm just trying to understand, Dennis, you just mentioned you're going to cut costs. But in the guidance, it looks like costs are actually up year-on-year -- or in the second half versus the first half. Is that right or am I missing something?

[Dennis J. Shaughnessy:]

Well, number one, you got 3 acquisitions in it, so just that you really closed in the second quarter, so the costs for those acquisitions and the contribution will be there. So that's just math. And so we are adjusting costs. Roger, why don't you take it from there?

[Roger D. Carlile:]

Yes. Paul, I think you read that right, and basically, it's the way the guidance would imply that. I think it does imply that the second half revenue will be down slightly. As we said, it'd be down as a result of the North American restructuring market, a little bit of the technology, other groups offsetting that somewhat by being better. So it does imply it's down in the range you said. On the cost side, you do have increased costs because of the acquisitions that closed in the quarter, so you have to add that in. We continue to be focused on -- there was a question earlier about were there cost reductions in the guidance. And we do -- we are looking at those, particularly those things, but we have had a continued focus all year in terms of just being more efficient in our various processes that might impact SG&A both in corporate unallocated SG&A and in the segments. And so I think we'll continue to work on that. And if that goes well, maybe you won't see that cost increase by the end of the year.

[Paul Ginocchio:]

Okay. And then just the second, assuming cash -- operating cash flow is similar to last year because it looks like earnings is going to be relatively similar to last year, and looking at your updated CapEx and your acquisition spend year-to-date plus the first quarter repurchase activity, you basically have spent all of your 2013 cash flow already, including the full year CapEx. So, is that why you stopped your buyback? Or how should we think about that?

[Roger D. Carlile:]

No. Well, first of all, I'm not -- I don't know if the premise is accurate. I think our cash from operations or free cash flow will be better this year, But remember, we started the year with sort of a $25 million positive because we advanced $25 million of bonuses into the product tax year. And so if you look at that updated guidance, it's about -- on the low end of the range, it's about $25 million better than it was when I gave that in February. And that's basically built on -- our teams across all of our businesses have done a very good job on keeping our DSOs at the targeted levels, and in some cases, below the targeted levels. So I think we're having good cash flow. We're -- at this point, as you can tell by looking at our financials, we're out of the revolver. We don't have any revolver debt. And we will be building cash for the remainder of the year. So the question is with that cash, what would we use that for? And historically, there's been 2 primary things we've used it for, one is acquisitions, the other is share repurchases. So we -- I think the way to think, moving on to your question about share repurchases, was at the time when the stock started moving up and set a new 52-week high, it wasn't obvious to us that we should buying at or near the 52-week high. As that -- if that condition changes, I think you could see us step back into the market to continue that. Well, we said before, when our board authorized that $250 million buyback, of which about $171 million is still in place, that runs through June of 2014, our intention was to complete that. It's subject to market conditions and things we see as we move along, but I think you could see us continue that. It was not stopped as a result of availability of cash.

[Paul Ginocchio:]

Great. So do you want to give us an operating cash flow estimate for 2013?

[Roger D. Carlile:]

I did that earlier in the notes. It was $200 million to $225 million of cash from operations for the year, and CapEx, $42 million to $47 million for the year.

[Operator:]

And that will end the question-and-answer session. At this time, I would like to turn the call back over to Mr. Jack Dunn for any additional or closing remarks.

[Jack B. Dunn:]

Thank you very much, and again, thanks to everybody for joining us today.

[Operator:]

And that will conclude today's call. We thank you for your participation.