FTI Consulting Inc (FCN) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the FTI Consulting second quarter results conference call. Following opening remarks from FTI's management, there will be a brief question-and-answer session. [OPERATOR INSTRUCTIONS]. I would now like the turn the call over to Jessica Liddell with the Abernathy MacGregor Group. Please go ahead, Ms. Liddell.

Thank you. Good morning and thank you for joining us to discuss FTI's second quarter results. By now you should have a copy of the earnings press release which was issued yesterday. Before I begin, I'd like to remind everyone that this conference call may include forward-looking statements that involve uncertainties and risks. There can be no assurance that actual results will not differ from the Company's expectations. The Company has experienced fluctuating revenues, operating income, and cash flow in prior periods and expects that this may occur from time to time in the future. As a result of these possible fluctuations, the Company's actual results may differ from our projections. Further preliminary results are subjected to normal year end adjustments. Other factors that could cause such differences include pace and timing of additional acquisitions, the Company's ability to realize cost savings and efficiencies, competitive and general economic conditions, retention of staff and clients and other risks described in the Company's filings with the Securities & Exchange Commission.

I would now like the turn the call over to Jack Dunn, President and CEO of FTI.

Thank you very much. And thanks to everyone for joining us today as we discuss our financial results for the second quarter of 2006. With me on the call are Dennis Shaughnessy, Chairman of our Board; Ted Pincus, our Chief Financial Officer; and Dom DiNapoli, Executive Vice President and Chief Operating Officer.

By now I'm sure you've all seen our press release discussing our results for the second quarter. So rather than repeat those results line by line, I'd like to discuss several items and then address what I believe are several important take-aways from the quarter and then most importantly get to your questions.

In the quarter, revenues increased by 29% to record levels of $159.8 million compared with 123.9 million for the second quarter of 2005. For the first half of the year, revenues rose 36.8% to $329 million compared with 240.5 million for the first half of 2005. This was done in the face of probably one of the most, if not the very most, challenging markets in corporate finance restructuring of the last ten years. In the first half of the year alone, Chapter 11 bankruptcies were down by 21% compared to the first half of last year and 51% lower than the levels that we saw five years ago. In the results, I would be remiss if I didn't note that we had a tremendous performance by our technology and information group. It grew by 117% in the second quarter and 123% year-to-date from last year's levels. It is now well on course to be a $100 million international business with 40% margins by the end of the year.

As I mentioned, I believe there are several important take-aways from the second quarter. The first is that as we had mentioned, we had made a significant investment in our restructuring practice in the U.K. Unfortunately, it's taking longer for that practice to gain traction than we had originally anticipated. We are disappointed in its results. As all of you know, our investments are couched in terms of expense, not capital. In the first half, this investment cost us 7% -- $0.07 per share. If you add this plus our share-based compensation expense back to our results, we are at a 25% EBITDA margin for the quarter. Second, three of our practices had significant EBITDA margin improvement in the quarter compared to the first quarter. Third, as we said at the time of our first quarter results, those results contain several success fees in the culmination of a large case that we believe needed to be balanced with our overall outlook for the first half of the year as a whole. This was why we did not want to address guidance until the second quarter was more fully confirmed. Despite this, the first and second quarters taken together met our budgets.

Second, let me address more specifically the good and the bad news with respect to our corporate finance restructuring practices. The great news is that we have been able to keep together the core of this practice that has been the number one practice in the U.S. and despite the lack of a market has been gaining market share by all measurable accounts. As we've kept them together, we have also kept them in -- deployed in activities that are not the traditional business that we've done in core restructuring, such as transaction advisory support. These new practices have not yet achieved the margin results that are consistent with our historical rates in the core restructuring and turn-around practices, but they're on the way. In terms of actual miss in margin for corporate finance, factoring out the U.K. was about 4 margin points during the first half from what we had originally anticipated.

For the next six months, we expect to see continued strong performance in technology. We have a good outlook for our forensic and litigation consulting practice with, for example, 25 active, reactive or prophylactic options back-dating cases, and another 19 hot active pursuits in these areas. We expect strong performance in our core economics practices of antitrust and finance. These are led by the Compass acquisition, which is out performing our originally anticipated results. These results are slightly offset by an investment we have made in several new practices in our corporate strategy area. That is why we expect our revenues for -- we are very comfortable and expect our revenues for the second half to exceed our prior guidance. We are comfortable that earnings will be within our range and that our ability to reach the higher end or even exceed those levels will depend on our success in meeting with the aforementioned challenges in our corporate finance restructuring practice and in the corporate strategy area of our economic consulting.

With that, I'd like to turn it over to you all for questions.

[OPERATOR INSTRUCTIONS]. Tobey Sommer.

Suntrust Robinson Humphrey. Thank you. I was wondering if you could give us a little bit more color regarding the scope of the investment and the size of the operation currently in the restructuring practice in -- in London and maybe describe stepping back, how you see that developing over time and why that's an attractive market for you? Thanks.

We have a combination of folks in the U.K. at the present time, London-based, that would involve both our interim management practice and also core restructuring practice. I think at the present time that encompasses somewhere in the neighborhood of about 15 individuals. As you can imagine when you start a practice, we have chosen to do it with the top professionals because that's the way we do things at FTI. So they're on an individual basis, their personal comp, et cetera, things like that, perquisites, would go into what we've experienced as the loss. We have several avenues open to us, obviously, as we go forward; and with the significant investment we've made, we hate to pull the plug too soon. But we are thinking that, for example, in the interim management area we may be able to transfer some of those people to advisory-type practice and beef up our presence there in that regard if the market for interim management over there does not turn. However, those of you who've been with us for awhile know that we aren't longest horizon on investments, and we really do expect our investments, especially commitments like, that to pay for themselves in a year or certainly shorter than a year time frame. So we'll be monitoring that situation very closely, and we will not wait to make changes there if they're required in order to achieve our results for the second part of the year.

Tobey, this is Dennis. We would not anticipate nor would we allow this to impact the second half to the same amount that it impacted the first. I think there are several opportunities to change the underlying burden that a new operation like this has to have in order to start it up. We're analyzing those activities. Some of those could be influenced by some external initiatives we put forth in the first six months that may come to bare. Others, we feel, are within our direct control, and we would be making appropriate fine-tuning of that to make sure that it doesn't have a [$0.07] impact on earnings for the second half.

Thank you. I'll ask one other question, I'll get back in the queue. Was wondering if you could update us on consultant retention trends? I know that those had improved in recent months, and wondering how that has shaped up recently and how that may be impacting your hiring plans in the back half of the year. Thank you.

Our -- as consistent with prior history, we have exceptionally good retention rates at the highest levels. Middle management is very good, and our turnover, the bulk of it, tends to be in our lower people, especially as we build out or pyramid of folks and younger people typically have other things. After they come to work, they go back-to-school, they pick other careers and things like that. So the trend we've seen was we had an exceptionally good year last year. And that was reflected in people's pay. That was reflected in people's bonuses. It was reflected in the first half of the year having extremely low turnover rates. We have taken a good look at that, and we see the high retention rates in addition with the fairly good market out there for hiring for the first time gives us an ability to really look at our workforce and to -- to make upgrades and things like that as the number of people that normally leave do, which we would see about the level of 15% or so.

We're 15% or lower year-to-date in this first half.

So, Tobey, we're running slightly ahead of the hiring plan, which is a function of good news and good news, success in recruiting the people that we were looking for as well as a lower-than-planned amount of churn on the loss side. Clearly, we would expect that equilibrate back and that will be done either by an increase in the amount of people that goes, some of which we might initiate, as well as simply a slowing down in the hiring plan to make sure that we end up with about the numbers that we had projected originally. We're comfortable at that level.

I think among our -- another factor that's working for us among our senior folks is we have a good deal of enthusiasm about some of our initiatives, International Risk has added a really new energy to the global risk practice because we really now have the ability to help our clients not just in the U.S. but literally all over the world, including some of the more sensitive areas such as Asia, Russia and eastern Europe. It's kind of getting to be the sense about here, people don't want to miss out on this as we grow and fulfill our plans over the next several years. So I would expect our retention rates at the higher levels especially to remain very, very attractive.

Thank you very much.

Arnold Ursaner.

Hi. Can you hear me okay?

Yes.

Good morning. A couple quick questions if I can. Can you just remind us what you have remaining in your repurchase authorization, and I know acquisitions have clearly been a part of your growth plan, with the stock at the current level, how -- again, I assume the Board will clearly reevaluate acquisitions versus share repurchase.

There's $33.5 million left for the remainder of this year in the share authorization program.

Yes, and I think it's fair to say that we -- as -- when we have available cash, which we are a significant cash generator, we look at the several opportunities that are there in front of us, and certainly share buyback is one of those opportunities.

Two more very quick questions if I may. Can you just show us or explain to us the financial treatment of the forgiving of the loans to the senior MD's? How does that run through the P&L?

They run through the P&L as compensation expense in direct costs over the period of the loan. So, for example, if it were a six-year loan, it would be 1/6 per year of the amount of the loan would hit our P&L as a portion of direct costs.

So it will continue to hit you over the next six years, is that the correct way to think about it, or is this in fact -- is there a retroactive hit to this?

No. There was no retroactive hit to the amount of the loans at all. It's all prospected from the day of the loan going forward.

Okay. And my final question if I can, obviously you just had your second analyst day. And for the second time that I can remember, you've had a pretty serious miswrite after a major analyst day. Can you comment what changed in restructuring so fast in the last month, month and a half if you could.

We have -- we have -- the ground rules for analyst day and maybe it's a good point that we ought to move analyst day is that we don't discuss the numbers then because we're in our quiet period. What has happened there, as we mentioned, there were -- in the first quarter there were success fees, and there was a significant amount of transfer of folks between divisions, so I don't know that it's a question of what changed so much then, as that we had said we would refresh our guidance after -- coordinated with this analyst call.

Okay. Thank you.

David Gold.

Hi. Good morning. It's Sidoti & Co. Wanted to flush out a little bit more on the restructuring side, essentially can you give us a little more color -- and I guess you commented on the release that you can take aggressive actions. What do we do to fix that? Do we cut some heads there or do we sort of sit around and wait for business to come in or what's sort of the move on fixing that?

Well, the non-facetious answer is you cut fat but not meat or bone. I think there are two things going on there when you look at the head count there. One is that in the transition from our core restructuring business in a time period where you can name your own price, we were moving into the transaction support area and perhaps as a -- the new kid on the block and that when you're competing with names that have been in there for 100 years, you don't get your premium pricing right up front. You have to build into that business. So that's a little bit of it. But I think your -- as this dearth of business continues, I think you have to look at -- everything's fair game at this point. We've just made a tremendous investment in that business, and it's time for those leaders to lead.

Got you. So is it -- just elaborating a little bit more, essentially would we be -- should we be surprised if we see you cut some heads there? Is that some -- that seems to be the easy way to kind of fix utilization, say, and then some.

It's -- I think all things are on a table, David. I think it's easier to look at from strictly a financial statement that it is to when you think about people, for example, to who have tremendous expertise in one area or another who may not be busy in this absolute worst market of all time, but I think that's something we have to look very carefully at.

Okay. And then, other question is, in the U.K. how aggressively might we expect you to continue investing there, say, in the second half of the year?

Well, I think, for example, in the technology business you'll see some aggressive investing, but that really is business that pays for itself as it comes on long. I think in the restructuring business, as I say, we're looking at overcapacity at this point, so I sure wouldn't see any continued or much continued investment in that.

David, it's Dennis. In the U.K. you've got -- the U.K. itself contributes in some areas. It obviously contributes in electronic evidence and technology. The miss here is, again, in corporate finance on the turn-around side. I think Jack explained in order to start that up you have to basically employ top-of-the-line people. I think part of the problem that you have is you have to lay a fairly significant logistical groundwork under them-- staff, support, facilities-- in order to make that offering credible. I think we have the ability to influence that spend rate going forward, and we think not denude the initial development expense that we've already incurred. So I think we can reduce that simply by a little more redirection in the way we spend the money, and obviously we don't expect the same results on the income side there. We expect to see more revenue in the second half and a better operation.

David, as I think Jack mentioned, it's coming -- the U.K. has come around slower than we had hoped it would, but in talking to some of our competitors, our experience here is not much different than theirs. We have to go after the right talent when they're available. Unfortunately, the U.K. market -- restructuring market is pretty much in the same position the U.S. is. It's very slow. We don't have the name recognition there that we have here. So we're developing it. And as Dennis said, near the second half we're looking for that activity to -- for the team's activities to pick up. We're building -- we're at a point now where we just about have critical mass, and adding senior people with relationships and market recognition should help the balance of the year and certainly into 2007.

Got you. Got you. Okay. Thanks.

Jim Wilson.

JMP Securities. Thanks. Was wondering, I guess, obviously, everybody's focused on the restructuring issue. Of your breakdown -- business line breakdown, how much would you characterize as restructuring versus -- so sort of reworking in a negative economy kind of business versus how much is corporate finance that's driven by sort of, if you will, positive economic growth kind of business driven decisions?

I am want sure we heard the question. Could you repeat it one more time?

Yes. Of your corporate finance restructuring component, how much of it is pure restructuring? How much of it -- which I think is the vast majority, and how much of it now is tied to more positive economic type activity, like M&A or anything else that's not in the restructuring side?

The majority of the revenues is still restructuring business. It's both on the advisory side and the intramanagement side, but a growing piece of the corporate finance bracket is the transaction advisory services that we develop to use the talents that were underutilized because of the lower restructuring, so it's -- in the area of 25% is probably a good guesstimate.

Yes, I think the -- especially the transaction advisory business is growing, so that by the end of the year we would hope that would be a solid 25% contributor with the other non-turn-around businesses.

Got it.

I think Jack or Dennis mentioned that the margins in the -- our transaction business isn't quite as high as we'd like them to be. We are the new kid on the block. Therefore, we're not able to put the same level of leverage on our projects because often times they're not as large individually as some of the mega projects that go on that are handled by some of the -- our much larger competitors. As we grow that business, that's one of the areas that we're focusing on.

Okay. And then the -- the large bankruptcy cases that you got assigned to, I guess, pretty much all last fall, were they still meaningful -- were they meaningful contributors or similar contributors to what they've been the last couple of quarters during Q2?

In the Q2 some of them are starting to wind down, in particular in the automotive space. We've got some that are going strong. It's a -- it's a mixed bag. They're probably in total not as active in the second half -- second quarter as they were in the first quarter.

Okay. And then I guess final question on the restructuring, in the guidance looking forward as it relates to particularly what's driving the EPS and the profitability, I'm trying to figure out of -- part of those one-time charges, what's a reasonable recurring margin or operating margin level for the restructuring business as you look through the balance of the year?

Well, I think the math would tell you since we're forecasting, Jim, in our revised guidance that the margin for corporate finance for the entire year is expected to run from 22.4 to 22.7. Call it 22.5 for the year, and for the first six months, we had a margin of 23.4. That means that we're expecting a little less than 22% for the back half of the year taken by itself in corporate finance.

Okay. So that with the charge taken out in Q2 that dropped it to 20, you would expect a little better than that on the -- sort of go-forward basis, the back half?

That -- when you talk about the charge, are you referring to the cost of running the U.K. operation?

Yes.

Well, there still will be costs of running the U.K. operation in the back half. As Dennis said, we don't expect it to be at the same rate as it was in the first half. But there still will be a significant investment continuing in the U.K. for the back half of the year. So it isn't just simply the removal of that entire cost.

It'll just be lower. Okay. All right. I got it. Thanks.

Chuck Ruff.

Insight Investments. Can you talk about where acquisition multiples are these days for the type of companies you like to buy?

I think we've seen acquisition multiples like everybody else has seen those go up a little bit. We used to be -- look at it four to six times. We're clearly in a world where you're talking about six to eight times or something like that. If we saw a particularly important strategic acquisition, it could be a little bit higher than that. What we believe is that the ability -- there are certainly -- there are strategic areas of the world where we need to be where we would consider paying a premium rather than go through the expense as we're witnessing of having to build a business de novo as we've experienced. So I think you've seen those premiums go up a little bit as I mentioned to the six to eight times level.

And that six to eight, does that include the cost to keep the important people?

Yes. We structure those, so that would be -- we wouldn't pay that kind of multiple without tying up the key people for the -- as you saw in the Compass example or others for a significant period of time, hopefully the rest of their careers. Dennis?

No, I was just going to say that I think one of the issues that I think everyone is facing is there's a staggering amount of money on the sidelines in the private equity firms, and they certainly seem to have raised the multiples they're willing to pay in order to deploy some of this money. The somewhat good news about that is we are now seeing structured finance being offered in these buyout deals that are approaching 5.5 to 6 to 1 times EBITDA. We do view that as a piece of good news going forward for our restructuring business because, in all honesty, this is about the level where everybody's -- got into serious trouble in the last cycle when these multiples of debt were offered. So I think the other thing we have to be careful of and we are cognizant of is, as you buy companies overseas, the dollar has not been holding up very well. While it doesn't impact the multiple if their earnings are being translated back, you run the risk of reverse arbitrage where you paid for something based on a currency exchange that then goes away, and the value of the earnings can be diminished going forward. So I think that has to be factored to a certain extent into your thought process.

Okay. If I remember right, it was maybe six months or so ago you were talking about why you expected the restructuring market to pick up, and you had a lot of reasons that sounded plausible, but now we're talking about the worst environment ever or at least in ten years. What does that say regarding your understanding and visibility of that market? Is it just -- is it that difficult to read?

Well, I think that we acknowledge at that time we were in that kind of market environment. We're not predicting it to get worse. We have a long with most people who are out there between rising interest rates, especially rising energy rates, and a superactive if not frothy acquisition marketplace, those are typically the signs that the market would improve. But I think what we said, I hope very clearly, was that it was a bad market, that we had predicted the rest of our year that it -- we aren't betting on any pie in the sky return to that marketplace. And it has been -- it has proven for almost all the professionals in our line of work, be they law firms, be they the banks, be they the vulture investors, et cetera, hard to say that -- when there's going to be a change in that marketplace. So we've gone out of the business of saying there's going to be a change and out of predicting there'll be a change, and when we did our budget this year we projected that marketplace to be flat. We did not predict the lack of traction in the U.K. operation.

Okay. All right. Thanks.

Tobey Sommer.

Thank you. Suntrust Robinson Humphrey. I wanted to see if you could review some of those numbers that you gave, I think, in your prepared remarks that I missed regarding the projects you're getting related to option back-dating and maybe some of the leads you had?

Yes. We have -- I think currently we have 25 active cases, and when I say an active case, that could be reactive i.e. to a subpoena or something like that, it could be prophylactic where a board just in abaisance to good corporate governance decides they want to bring us in to do a review of their practices, and then there are another as of this morning I think another 19 active pursuits of cases that -- that we're working to secure. So it's been a -- it's been a large piece of business.

Could you comment as to what you think your market share is there, and how meaningful you think that this aspect of your business may or may not become over the next couple quarters?

Yes. I heard one of our competitors claim that they were the largest in this area. So it's hard -- when I add up the cases that I believe are out there and our market share, it's hard to actually say I think we have -- if you say the world right now is 80 to 130, something like that, and we have 25 and we have another 19 that we're in active pursuit of, I think our market -- or our presence in that marketplace is a factor. I think people who are considering this issue are considering FTI as somebody to help them because we combine not only the content expertise but also the SEC expertise of Marty Wilczynski and Roy Van Brunt and Ernie Ten Eyck and our great professionals who are experts on how to handle those issues vis-a-vis restatement, et cetera. In terms of a dial mover, my view so far is this is just one of those things that almost happens every -- there's something that goes into why we're able to predict not with certainty who our client is going to be but we'll have clients. It's one of those things. Where this will gain in my opinion some more significant scale will be when these things develop into from investigations into restatements and potential shareholder suits, that kind of thing.

Okay. Thanks. And the -- was wondering if you could give us some color on the technology unit and I think at your analyst day talked about the change to the civil procedures for federal courts, and that that may drive -- serve as a catalyst for your technology business. Wondering if you could comment on that and also what proportion of the technology revenues are attributed to kind of ASP-type model at this point?

The -- in terms of the evidentiary requirement, evidence in law tends to follow what practice is. It's a pretty standard thing that in the litigation or the legal arena, if somebody has found a better way to do things, you better do it like they are, or you might be -- have a problem with your successful and your -- your qualified representation of your clients. So what we're seeing after some fairly dramatic examples of people not doing the electronic evidence discovery the right way is real -- a real flight to quality in that area, so the fact that we have great systems, the fact that our backbone is extremely strong, the fact that we have the ability not only to do the technological aspect of it, but also the content has been what's distinguished us in the marketplace, and I think is responsible for some of our tremendous growth. But basically, the -- like with paper trails, like with other things, the use of electronic evidence, the ability to make representations to the court about your delivery of documents has taken on a -- has become jacks or better in the litigation area so that that's what's driving it. It has become from something of an outlier to now an absolute standard. As we look at the breakdown as we had mentioned before, I believe, about looking at our technology unit as a whole, we would expect that on our hosting business, that that by the end of the year which is our -- which was more of our annuity business as opposed to incident driven, we would hope to be somewhere in the neighborhood of 30 to 35% of the revenues in that area, and that we would look at -- the remainder would be made up as the kind of swat responses that you have on electronic evidence and also the -- to a smaller extent, the consulting that would go with the hosting where you have to help people get their documents originally on our system and develop the custom systems for them that allow them to search them, retrieve them, and use them to their best effect.

One follow-up. Is that ASP revenue growing at -- portion of the technology revenue growing at roughly the same rate as the overall head line rate?

It is growing at the same rate, if not a little bit faster because, as you can imagine, one matter there can make a serious impact on your growth rate, and the matters are huge.

Thank you very much. Thank you.

Bill Sutherland.

Thank you. Boenning & Scattergood. Ted, a little -- a little color on the balance sheet. The -- I know cash -- cash demands are heavier in the first half. Where were you as far as receivables, I guess, DSOs and then also could you speak to the accrued compensation?

Yes. The DSOs are running about 90 days, about the same thing at the end of the -- at the end of the first quarter for the same typical reasons. Our highest quality clients are also our slowest paying clients. Fortune 100 Corporations of the world hasn't changed much in that regard. We continue to penetrate that client base more and more, and so we are experiencing about the same DSO's as we've had in the past. The cash needs of the business continue to be about the same in terms of the first quarter. But what happened in the second quarter, as you know, the vast majority of the [S&Ds] that signed on, signed on in that second quarter, and so there was almost 16, $17 million of cash used toward those sign-on loans just in the second quarter. The other thing that happened, Bill, and it really happened in a combination of the first and second quarter, you may recall some of the major -- that one major success fee that we received in the -- in the fourth quarter last year that was kind of an anomaly to our business, the $22.5 million.

Right.

The bonuses associated with that were, of course, paid in 2006, as you might imagine. They weren't paid at the time that we got that revenue in 2005. They're paid with all of our bonuses which is a combination of the first and second quarters of the year. So those two factors alone, that accounts really for the big change in the accrued bonus number as well.

Okay. And CapEx for the balance of the year, you're looking kind of in line?

Actually, a little lower than we anticipated. We're still holding to the roughly 20 to $24 million of CapEx for the year. But honestly, at the rate that we're running 9 million through the first half of the year, it may be -- it may be a little less than we anticipated. But as the technology business continues to grow as it has, it -- it uses about 40% of the CapEx that we incur, roughly 60% of the CapEx for what you might refer to as maintenance CapEx, computers for our people, et cetera, et cetera.

So you mean when you say 40% for IT, you mean the technology practice, Ted?

Technology practice.

Yes. Okay. And then on debt repayment, it's minimal, I assume for the --?

There actually is no debt repayment scheduled. What you see in the debt outstanding is really accounting --

Okay.

-- for the derivative function in that debt. It's a -- it's a strange number that can go up and down any quarter, but the debt itself remains at $350 million.

And the last number question, guidance on net interest, I guess it's going to go up in the current quarter and perhaps next quarter from Q2 because of the acquisition?

Well --

Or not?

-- net interest is -- net interest expense is the same number as it's been. It's a fixed number. Interest income declined because of the uses of our cash, and it's -- we would expect our -- that our cash flow becomes more positive in the back half as is customary, but then, of course, we used 9, $10 million of it for an acquisition right on July 1st --

Right.

-- for International Risk, so it's a little bit of a wild card. It depends to a certain extent on what we do with our stock buyback program and what we do with any future acquisitions if there are any in the second half of the year. But if there are none of those, for example, then you would expect your interest income to start reclimbing back as our cash balances.

Sure. I was just sort of backing into a higher number based on your EBITDA guidance.

Again, as I say, you would expect that to be the case subject to whatever we do, if anything, on our stock buyback or acquisitions in the second half, and there was an acquisition already in the second half.

And then one last question, I know you can't predict successes fees, but does it feel like kind of a normal -- the business that lays out before you here -- kind of the same typical mix, Jack, of fee that might be there?

The -- as I say, we had the extraordinary success fee in the fourth quarter of last year. The others are -- it looks -- going forward it looks like it should be fairly evenly paced for the rest of the year. That's based on -- that's getting to closing and getting the check so the deals are -- in today's world and every world as long as I've been around M&A, that they're never done until they're done. But it's -- that's the way it lays out right now. We don't have a big projection for one in the third quarter or the fourth quarter, and we don't have one that skews these results, particularly regarding our range.

Right. Okay. Thanks.

Brett Manderfeld.

Hi. It's Piper Jaffray. Couple questions related to the forensic and litigation practice. I think you'd mentioned that you had a couple of big projects that hit in Q1 that didn't look like they did in Q2. I wanted to make sure of that. And then related to that, any kind of change in the demand environment there? I would assume if anything, given all the new option, back-dating work, that the second half would look as good or better than the first half of the year. Thanks.

Yes. I think we -- there is not another case of the magnitude that we were talking about that was in the first quarter, and that as we look forward it's based on really pretty much not to denigrate it at all because the folks are doing great by chopping wood and carrying water. There's a good market out there, as I think most of our competitors have acknowledged as well. And that's just us getting our fair share of it and given the cadre of intellectual capital we have, we usually get our fair share or more.

Is --do you see anything kind of the magnitude of that big project in the first quarter, Jack, or is there anything out there like that?

We haven't seen anything like that quite at the present time. As I say -- and I wouldn't say that the options back-dating ones are that potential until we get to see where they head with -- vis-a-vis restatement and shareholder issues, that kind of thing.

You never do see it. We didn't see the other one that was developed in the fourth quarter and ended in the first quarter. I think the only thing we know is they tend to develop, but it's almost impossible to forecast because they tend to be very crisis-driven. They tend to require a lot of people to go into the project and have a very short-term duration, but it's a -- normally a big risk, high bet on the Company side, so will they be there, yes. It's impossible to predict. We didn't see the one that we had before, and we haven't normally seen them in the past, but they are very, very event-driven, and it tends to be driven -- maybe they're influenced by a trend, but it tends to be company unique and very event-driven.

Is it fair to say that the project we're talking about in the first quarter was in the kind of 4, 5, $6 million range that hit in the first quarter and did in the second quarter?

That would be a conservative number.

Okay. Very good. Thanks.

Jim Wilson.

Oh, sorry. That was my question also on the large assignment for Q1. So that's all I had. Thanks.

Ashok Ahuja, ICOR.

Hi. I guess I was hoping you could help me understand your market in the options area if you will, the size of the market and what kind of potential opportunity that represents for you. As I look at it, [Dr.Lee's] article seems to say that up to 10% of companies may have been involved with some potential problems in that area. I look at Mercury Interactive, and I think they spent something in the ballpark of 100 million overall to resolve the issues, although I'm sure they're one of the worst cases out there. And then it appears as though a lot of companies are beginning to take proactive kind of thing to this particular issue. You mentioned that you have about 25 assignments and up to 19 more that you're looking at -- or working on out of a total of 80 to 130. So I guess my questions are first, how big do you think this really is for your kind of business of the potential 100 million that somebody like Mercury Interactive might have spent in this area, but how much of it would somebody like you possibly be a target for? I guess those are the general questions.

That's a good question. And we have been trying to downplay this as a line item or dial mover until it has a little more flesh to it. To get -- I saw the study that you referenced where the -- on a mathematical basis based just on the timing of grants and the --

The [magical action thereafter].

Right. The conclusion was it had to be more than dumb luck.

Right.

And I'm sure that it was, but I think in each of those cases he didn't then go to the materiality of it being -- it could have been some option timing, but if it ended up being $100,000 or $200,000 issue, I'm not sure that the 80/20 rule won't apply. It may be 10% of companies, but it may be 200 or 400 that have an issue. I think where you'll see this become of the magnitude you're talking about would be in regard to an SEC pronouncement where they would say you had to make some kind of affirmative statement about your options practices or something, and then you'd have a lot more people have to look at the issue prophylactically. So I don't -- I don't think that 10% of companies would be the realistic view of the target market here. And I think that -- and the types of settlements you're talking about, what -- the reason that we make our money is because we have dedicated our profit value proposition to being involved in high stakes matters for our clients. So I think that I don't think this is going to be a host of companies rushing to the alter unless the SEC, again, as they've done with compensation and other things, make this a focus in a ministerial way that makes all the companies address the issue like they did with the 404 kinds of audits, that kind of thing.

Yes. If I recall right, I saw a note from [SDSS] saying they had used you, and if their case, they did a proactive thing from what I could tell and in -- all in all, I think their total restatements were relatively of a small magnitude.

Yes. Obviously can't -- I can't comment.

Well, I'm asking -- I'm just say what they officially released in their press release was numbers that were relatively insignificant compared to the Mercury Interactives. That's all I am talking about. So I'm sure there are a lot of companies in that 10% that fall in that ballpark. But it would still seem that the number is going to be a lot greater than the 80 to 130 by the time we're done. I don't know whether it's 250, 500, but it probably is not 10% of all listed companies.

I think -- this is Dennis Shaughnessy. I think the thing you should be watchful for and that's what we're looking at, is sort of two trends. Number one, if you talk to people that are doing this, that includes law firms, ourselves, some of our competitors, in a way the initial phase of it is somewhat of a triage. Some of the issues you're seeing in some of these companies are simply sloppiness. There's not a lot of culpability there. Some of them, it's starting to get into the area of bad governance, and you could have some legal ramification and culpability through regulatory or through shareholder suits. And then unfortunately, some of it does not look that good, and therefore you could have significant regulatory penalty either through the IRS, SEC, or civil action. I think as that third part of the triage, or segment it any way you want, matures, that will indicate for people in our industry to a certain extent, how much more these assignments will move from an investigative assignment, which are nice and make us good money, to a much longer term, multi-year assignment where there's complex litigation, where more of our operations are utilized, and you're talking about much, much larger and bigger projects to be working on. So I think part of it will be how they mature. I think it's a little deceptive when you look at there is 130 or 140 companies because some of it is just a little house cleaning. I am not trying to say that's the case in all of them. But as I said, I think the second shoe has to drop, and that's in the triage or quintile or whatever slice and dice you want to use. They mature into much more difficult and expensive legal challenges to these clients, either on a regulatory basis or on some plaintiff bar driven basis.

One thing that's true is that the information market is perfect. So we'll know vis-a-vis things like that study both the ones where there's been this coincidence of a great creation of value, so that -- I think it's a market that whether it's 1,000 or whether it's 500 will be be very thoroughly vetted and will be obvious as opposed to something that -- both on the prophylactic and on the reactive side.

Okay. But even knowing what you know at this point and assuming it isn't even much more than the 80 to 130, are we talking about a total market that, for your kind of business, is in the $50 million neighborhood, $100 million, 30, in any kind of range that you can project at all?

No. I think that you're talking about a universe that's -- that's less than that, $1 million for an investigative case is a large fee, so at the outset you're talking about -- all of those won't be that. They'll be relatively minor investigations that prove that there was nothing wrong. So it's not a big enough market that we have put a number to it like that, and it's certainly not something that's a material part of our projections or our outlook going forward. It's just -- as I said, it's another one of those things that come up in corporate America. It is kind of the -- that's the focus du jour, and there'll be -- I promise you there'll be something else that's like this next year.

Thanks a lot.

[OPERATOR INSTRUCTIONS]. Adam [Wabild].

Silver Oak Services Partners. Good morning.

Good morning.

Dennis, a very high-level question, building on the comment you made earlier about where we are in the private equity leverage and investment cycle as it relates to your business. I mean, you all have significantly broadened the scope and scale of the business obviously since the last cycle trough in restructuring. And I wonder if you can give us some quantitative sense for where you stand in terms of the progress of building your wallet share with the financial sponsors' universe over the last four or five year, and how you think that positions you to translate that development into the restructuring business into the next up turn?

It's a very good question. I think as you know, and I think as a lot has been written, the banks who were sort of the main drivers of the last restructuring cycle have done an excellent job of not holding any paper in this new upturn, and clearly the funds have been buying debt now on a stripped basis to where the funds have everything from secure to second lien to mezzanine to debentures that they hold as well even equity in some of these deals. We -- I think as we said before, our transaction support group has been growing very rapidly. We expect it'll be on a $50 million plus run rate on an annualized basis very soon. It has helped us significantly embed our relationship deeply with some of these mega funds, so we are actually doing due diligence work on the front end of deals for named funds right now all across the world. We have several in Asia that we're working on. We have them down in Latin America, and of course we have numerous ones here. Our people have an aggressive calling program to not only sell this transactional support work but to further embed our brand and our capabilities sort of into the fabric of these very large funds that we know are having an excellent record on the upside right now will have challenges in their portfolio in the down side if this market starts to change against them. Clearly, the question that was raised before about how difficult is it to call these turns? Well, it's impossible to call them and almost everybody has seen disaster lurking two quarters away, and it hasn't happened yet. But I think if you look at the normal metrics that seem to be a leading indicator, you are seeing significantly more down grades than upgrades of debt by the rating agencies that has continued to build quarter after quarter. We are now seeing debt multiples on EBITDA return to really the peak of where they were at the last cycle. We're now even hearing in some of sort of the specialty industries' media especially they're even approaching 10 to 1. Now, granted they've always been higher there, but those are record. And again, those purchases are being driven by private equity firms. They're not being driven by strategic firms. So I think we're well-positioned to take advantage of our relationships there, and we are working very aggressively to broaden our relationship because we -- we, like you, believe that's where the action will be in the next restructuring cycle whenever it matures.

Also, getting the opportunity to work with them on the upfront due diligence gets us more familiar with the investment so we have an opportunity to spot ways that we can make that investment more profitable for them and heaven forbid their investments start to stumble. There have been a number of cases where we've been brought in because of our familiarity with the people and the actual operations of the business. So it will help us on both ends.

And, Dennis and Dom, that's very helpful color. If you had to quantify what percentage of FTI's aggregate revenue comes from financial sponsored clients today as opposed to other types of clients and compare that with several years ago, could you give us some -- some sense for how that's developed?

It's not a huge percentage of all FTI. And to make that analysis, you've got to take a look at some of the committees that we work for that are no longer banks. It's banks and sponsors and funds. So it's really a hodgepodge of a new type of client that we're seeing, and we are focused, as Dennis said. The banks are no longer the only senior lenders you need to focus on. It's other funds that are taking pieces and in some cases, very large pieces and controlling interest in some of these debt facilities, and we are working our relationships to -- to expand that because it -- just -- it's amazing, just five years ago just looking at who the major candidates for a client would be versus today, it's a very different waterfront that we're --

Yes. On the transaction support, the vast majority of that revenue is driven by private equity firms. That would almost be 100%. I think Dom is right on. Of the balance of the income in corporate finance, with the exception of classic company-side work and especially in the turn-around business, all of the creditor-side work we are in some way, shape or form touching private equity firms because simply the ownership of the debt has changed over the last 10 to 15 years. So it would be --they are the drivers to a great extent of a large majority of those assignments.

Yes. Historically, Adam, when -- back in 2000, we were probably 90% creditor. And that 20 -- that was probably 24 or 25 banks. With the advent of the PWC folks coming over, that ratio moved more like to 60 company, 50 bank. And today, I would think, between the transaction support, as Dennis mentioned, and the move much more to company side or the creditor of committee side, that would give you an order of magnitude of where our equity sponsor business might be at this point. We would -- as we say, we would hope transaction support by the end of the year would be a solid 20-plus percent contributor to our corporate finance restructuring revenues.

Very helpful, Jack. Thanks.

Thank you. Gentlemen, at this time we have no further questions. Please continue with any closing remarks you would like to make.

Okay. I just again would like to thank everyone for being with us this morning. We believe we have an awful lot of good things going right now. We have a lot of enthusiasm among our people, our markets are good except for corporate finance restructuring. We will be taking aggressive steps, as we mentioned in our release, to address that so that we look forward to coming to you at the third quarter the proof of what we've been able to accomplish in that time span. So with that, thank you.

Thank you. Ladies and gentlemen, this concludes the FTI Consulting second quarter earnings conference call. If you would like to listen to a replay of today's conference, please dial 1-800-405-2236 or 303-590-3000 and use access code 11067025 followed by the pound sign. A webcast of the call will be -- will also be available on the Company's website, www.fticounsulting.com for the next 90 days. We thank you for your participation in today's call. You may now disconnect.