FTI Consulting Inc (FCN) 2010 Q3 法說會逐字稿

Good day, everyone, and welcome to the FTI Consulting third quarter earnings conference call. As a reminder, today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Eric Boyriven of FD. Please go ahead, sir.

Good morning, and welcome to the FTI Consulting conference call to discuss the Company's 2010 third quarter results which were reported earlier this morning. Management will begin with formal remarks, after which we will take your questions.

Before we begin, I would like to remind everyone that this conference call may include forward-looking statements within the meaning of Section 21 of the Securities Exchange Act of 1934 that involve uncertainties and risks. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues, future results, and performance expectations, planned or intentioned business trends, and other information that is not historical, including statements regarding estimates of our future financial results.

For a discussion of risks and other factors that may cause actual results or events to differ from those contemplated by forward-looking statements, investors should review the Safe Harbor statement in the earnings press release we issued this morning, a copy of which is available on our website at www.fticonsulting.com, as well as the disclosures under the heading "Risk Factors and Forward-Looking Information" in our most recent Form 10K, and in our filings with the Securities and Exchange Commission. Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this earnings call.

During the call, we will discuss certain non-GAAP financial measures such as EBITDA. For a discussion of the these non-GAAP financial measures as well as reconciliations of these non-GAAP financial measures to the most nearly comparable GAAP measures, investors should review the press release we issued this morning.

With these formalities out of the way, I'd like to turn the call over to Jack Dunn, President and Chief Executive Officer. Jack, please go ahead.

Thank you, Eric. Good morning, and thank you all for joining us. With me on the call are Dennis Shaughnessy, our Chairman; David Bannister, our Chief Financial Officer; and Dom DiNapoli, our Chief Operating Officer.

Our results were released first thing this morning, and I hope you've had a chance to review them; if not, they are available on our website at www.fticonsulting.com. Since we last spoke, the business climate and our view have not changed. It is our goal on this call to briefly recap our third-quarter performance and then open it up for your questions.

As was true last quarter, as a general matter, our procyclical businesses continued to follow the trajectory of the improving economy, while the high-yield market, and at least temporarily sympathetic creditors, continue to impact the restructuring side of our business. With the continuing caveat that M&A and capital markets work remain very slow, and that affects almost all of our segments. Unlike last quarter, however, where our procyclical businesses did not improve as fast as we thought, and our restructuring business declined faster, in the third quarter, growth in our procyclical business all but offset the decline in restructuring, even comparing to a record third quarter last year. The harder part was equalling the profitability of the declining restructuring revenues, which at the margin are our highest.

As I said, our third-quarter revenues of $346 million were down only slightly from a third-quarter record $349 million a year ago, despite a 14% decline in our corporate finance restructuring segment. Excluding Corp. Fin., aggregate revenues of our other segments increased about 7% year-over-year, with outstanding organic growth performance in Forensic Litigation and Technology. The $346 million of revenue in the quarter was also fairly consistent with the $349 million that we reported in the previous quarter, which supports our view that we are bumping along a bottom here while we transition through the economic cycle.

Adjusted EBITDA in the quarter was $65 million, compared to about $78 million a year ago. Again, hard to top the profitability and restructuring revenues generated at the peak of a bankruptcy cycle. The third-quarter Adjusted EBITDA margin was 18.8%, down from 22.3% a year ago, but again, virtually identical to the second quarter.

Our EPS in the quarter was $0.47, compared to earnings per share of $0.70 a year ago. EPS included a $0.07 charge for the early extinguishment of debt in connection with our financing activities, which I will go into in detail in a few minutes. Excluding this charge, our adjusted earnings per share was $0.54.

Our tax rate in the third quarter was a more normalized 38%, compared to 32% in the prior-year period when we implemented some strategies to enhance our tax position. The impact of the prior-year tax benefit, however, was ameliorated by the positive impact to earnings per share from a reduced share count, as a result of our continuing share repurchase program.

Behind the numbers, there were two important stories worthy of highlighting; the major improvement we achieved in our capital position, and the progress we made in our international expansion. We have often talked about the importance of having a global presence, in order to serve our clients wherever their problems are and wherever their capital flows. The fruits of our investments on this front continue to pay-off, as our revenues outside the US increased a robust 16% in third quarter, and grew as a percent of total revenues from 19% a year ago, to 22% this quarter.

Growth was also robust in the Asia-Pacific region, where we have made major investments this year and have seen growth in our Asian investigations practice. Our international arbitration practice that we have been building in economic consulting continues to gain traction in the market, and also posted a strong revenue growth from the prior-year quarter. The acquisition of FS Asia Advisory, formerly Ferrier Hodgson Hong Kong Group, one of the pre-eminent restructuring firms in the region, is another important step for us that greatly enhances our critical mass in the Asian market, and solidly positions us to participate in the capital flows going into that market. We are now better able to advise our clients who are investing capital in Asia with on-the-ground resources and local marketing knowledge, and expertise in restructuring due diligence of FCPA, specifically, as well as a broad set of capabilities across our Corporate Finance, Restructuring, FLC, Strategic Communications, and Technology segments in Asia. We now have 335 people in Hong Kong and throughout Asia, rivaling Washington and Chicago to be our third largest office.

At the corporate level, an important strategic accomplishment in the quarter was the financing we put in place that provides us with fixed low-cost source of capital to fund our plans for growth and expansion. We originally set-out to take advantage of the current very favorable conditions in the debt markets to raise $350 million. The response to our offering was very strong, and we were able to increase the capital raised to $400 million with a maturity in 10 years, and a secure an attractive rate of 6.75%. Proceeds from this offering enabled us to retire $200 million of our 7.625% notes that were due in 2013, so we were able to extend our maturity schedules at lower interest rates, and raise net cash of $187 million to execute our business plan. During the quarter, we also entered into a $250 million, five-year credit agreement that replaces the $175 million credit facility that was due to mature next year. This also provides us with more capital to invest in our business.

Now, I will look at the segments. Revenue in our Corporate Finance Restructuring segment in the quarter was $109.7 million, a decline of $18 million or 14% from a year ago, and slightly less than the $111 million in the prior quarter. Our second and third quarter results compare against the peak of the restructuring cycle in the middle of 2009, and reflect a significantly lower level of activity in that market. Adjusted Segment EBITDA was $26.7 million in the quarter, equal to 24.3% of revenues. This was down from extremely high margins at the peak of the cycle, but in-line with the 2010 second quarter. We are managing headcount and expenses in the business to maintain our margin.

The Forensic and Litigation Consulting segment had an excellent performance in the quarter, even comparing against a year-ago period when we were extremely busy with two large fraud cases, FLC reported and increase of 12% in revenues for the quarter. The vast majority of this organic growth, one of the strongest organic growth rates for FLC in recent history, was driven by an overall increase in Corporate Litigation and Investigations activity, continued strong results from the Regulated Industries practice, especially in healthcare and pharma, the Ibero-American and Asian Investigations practices, several new FCPA Investigations, and cases arising from the financial crisis and mortgage-backed securities. Adjusted Segment EBITDA in FLC was $20.2 million, equal to 24% of revenues, up from $18.6 million a year ago. Adjusted Segment EBITDA margins were down a little from a year ago, but consistent with the 2010 second quarter.

In Economic Consulting, revenues were flat year-over-year at $59.4 million. Despite continued slowness in antitrust M&A, a continued strong growth of our European operations and good securities and financial litigation activity, such as the Terra Firma versus Citigroup case, where Dan [Paschal] and his team helped our client and the folks at Paul Weiss achieve a stunning victory yesterday, added to the mix and kept the business going. In addition, our activities in international arbitration continued to pick-up steam, and our investments in building out the team are paying off. Adjusted Segment EBITDA for ECON was $11.9 million, compared to $14 million a year ago, and Adjusted Segment EBITDA margins were 20% of revenues, compared to 23.4% of revenues a year ago. Our original view that we will participate in the eventual upturn in strategic M&A and large investigations remains intact. Companies have come out of the recession with an extremely high level of liquidity and, in absence of momentum in developed world economies, are likely to look outside their home markets and make-up the slack with deal making that takes them into higher-growth markets. We're pleased to see that activity began to pick-up during September, and this momentum has continued through October.

Technology also had an excellent quarter. Revenues grew 10% to about $43 million on the strength of increased litigation and investigations activity, increased hosting volumes, and the continued success of our Acuity Document Review Service offering. While M&A second requests and certain product liability engagements remain below normal, Technology experienced faster growth outside the US from increased work on litigation and regulatory matters in Europe and Australia. Adjusted Segment EBITDA in the quarter increased 20% to $13.9 million, and the Adjusted Segment EBITDA margin in the quarter was a strong 32.6%. We've aggressively managed expenses to maintain margins in the face of competitive pricing in this segment.

In the absence of buoyant M&A and IPO markets, Strategic Communications continued to recover from the impact of the recession. Revenues in the quarter increased 6% to a little over $50 million, the best revenue figure for this group since 2008. The Americas contributed a good portion of the growth, as they continued to increase the breadth of their engagements with key accounts, and were helped by crisis work on Transocean. And, Asia-Pacific also had strong performance. Business trends overall have improved from 2009, and the segment recorded its fourth consecutive quarter of net annualized retainer wins. Adjusted Segment EBITDA margins improved to 14.4% in Q3, from 13.8% a year ago, thanks to the strong management of expenses.

To sum up, while we managed through the transition of the economy, we are working hard to put in place the operational and financial infrastructure that will promote our continued success. We are strengthening our ability to service our clients on a global basis with greater critical mass and broader expertise in the regions with high growth potential, and these efforts are paying off. We continue to make selective hires and acquisitions that deepen our skills, and these investments are increasingly getting traction in the markets as they gear-up, and we have put in place a robust capitalization that provides us with a fixed, low-cost sources of funds, to enable us to invest in those assets which will drive our growth. With that, we'll turn it over to your questions.

Thank you. The question-and-answer session today will be conducted electronically. (Operator Instructions) We'll take as many questions as time permits. (Operator Instructions) We'll pause for just a moment to assemble a queue. We will first take Tim McHugh with William Blair & Company.

Yes. Hi, guys. First, I wanted to ask about the restructuring business. If I adjust for the acquisition you made in that segment, it seems like revenue still fell off a little sequentially there. On the last call, I think you had suggested you felt like you were starting to see signs of stability over the last couple months, I can't remember the comment exactly, but I think it was the last few months. Can you -- does that mean the business fell off later in the quarter, or can you give us an update on your sense of stability there or if you think we're starting to get to a base level?

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

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

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

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

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

Okay thanks.

Next, David Gold with Sidoti.

Hi. Good morning. To follow up on the restructuring question. Dom, if the business feels stable, and juggling that with the comment that -- Jack's comments that you're going to manage the business headcount and expenses maintain margin. Does that suggest that basically you'd manage those expenses to this level of stability?

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

Okay. Can you speak for a second -- assuming we're in a declining period for some time, a little bit of a reminder on the fungibility of the junior levels of the profession there.

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

Just one last one, if I might. On the litigation front, pleased to see some pick up there. Just, broadly, thoughts on both sustainability and basically what's gotten us to the thaw out, and is it something you expect to continue into next year?

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

Thank you both.

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

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

We've seen bred not only across the world and even in the US, our new Boston office is knocking the cover off the ball. It does feel like there really has been a turn of events in that area.

Next up, Paul Ginocchio with Deutsche Bank.

Good morning. This is actually [Ato Garrett] on behalf of Paul Ginocchio. And I was looking at your implied fourth quarter guidance. It looks like it's $0.74 to $1.04.. That seems a little high relative to recent performance in the --

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

Great. Thank you. Also, I have a question regarding the Acuity offering. Can you give me some estimate of the revenue size relating to Acuity or its impact on year-over-year growth.

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

By definition, the area of the market that it attacks are always large cases, typically, not atypically, seven figures, and if it does catch on the way we think it will, it can be a dial mover for us going forward.

Great. Thank you very much.

Next, Arnie Ursaner with CJS Securities.

First, a bookkeeping question. What was your end-of-quarter share count, please? And then, more broadly, with the slowing demand environment, I have two questions that relate to that.

Could you speak up a little, Arnie? We're having a hard time hearing you.

Is that any better?

That's better. Thank you.

With demand slowing, just -- are you seeing your even good quality competitors reacting to some of that by price, or are you seeing customers knowing there's a fair amount of capacity out there, pressing you on price? And then as a follow-up to that, in terms of consultant utilization where obviously you do a lot of work, and people that work hard in your organization don't work 40 hour weeks. They work substantially more and bill substantially more hours than that. With the slow down, even with the head count in place, is that going to have a pretty meaningful impact? Maybe remind, us if you would, how you think about utilization -- you don't do it on a 40-hour week, and whether the slow demand trends are impacting even the existing consultants you have and their billable hours.

I feel like Rodney Dangerfield. That is a ten part question. Go ahead, Dom.

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

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

Arnie, the share counts -- the weighted average for the quarter were 46808, and the shares outstanding at the end of the quarter were 46427.

Thank you very much.

Tobey Sommer with SunTrust.

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

Hiring, I would say clearly, as Dom has said, we have continued to right size. We took the severance in the quarter in Corporate Finance as we continued to right size that down to its new demand -- the new demand curve in the marketplace for it. I would not see us making across-the-board substantial hires there, but clearly it's not a homogeneous market. As Dom was saying, Spain, for example, in restructuring has really heated up, and I think you will see us adding people there. Asia is still a very vibrant market for recovery and restructuring, so I think you would see us adding there. And Latin America, again, has had a very good year in restructuring, and you could see us adding there. The US, probably not. We think were at our right area there and that might balance off, in all honesty, some of new hires somewhere else.

With the caveat that the things that are procyclical are our Transaction Advisory business. I think you'll see moves there (inaudible). And the valuation business are areas where as the economy swings, should very good, and we have those housed in Corporate Finance.

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

$225 million.

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

Thank you very much.

Next, T.C. Robillard with Signal Hill Capital.

Thank you. Good morning, everyone. Just following up on the use of cash there. Would you feel comfortable, or would you be willing to do a multiple acquisitions at the same time or within --

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

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

What I was trying to tell you is what we have is we have a base that -- we're approaching a base level for Corporate Finance. I think as Jack illustrated, we're actually starting to see some very good growth in the other areas, and we're still seeing a decline in Corporate Finance. It really is hinging on where you start to see that floor kicking in on Corporate Finance. We're cautiously optimistic. We're watching the billable hours now. The utilization in Corporate Finance is starting to move in the right direction. And clearly, the biggest drag on margin is utilization, and it's in pockets, so it's not a nice, neat, homogeneous -- some areas in Corporate Finance, utilization is doing extremely well. Others, it is not good. But were moving resources around. Some of the areas that are slow are starting to heat up a little bit. So, the biggest change in margin will be driven by Corporate Finance stabilizing into a new normal.

As I said, I think we're cautiously optimistic that were on the right -- we're tacking in the right area. Now, whether it hits us in the fourth quarter or it's more of a first-quarter phenomenon, we at least are starting to see some stability and some consistency in meeting monthly hourly forecast versus consistently missing them because of business burning off and not being able to replace it. It's hard. You would think in our business it would be -- the easiest thing would be to forecast quarterly. It's actually harder to forecast quarterly because there's so many things that swing in. And in the fourth quarter, remember, is the quarter were we book most of our success fees that are based on a calendar-year performance. That can have a meaningful -- and the success fees have, as you can imagine, a very high-margin attached to them because they are post assignment fees. And depending on how they fall in, if they all fall in the fourth quarter you'll see the margin move. If some of them fall in the fourth quarter and some of them in the first quarter, you might see the margin move more in the first quarter as that resolves. So, it's a little bit of a timing, and this is a very difficult quarter for us to predict.

Okay. Fair enough. I understand. That color is very helpful. Given your cautious optimism on the base revenue level for the restructuring practice, should we be thinking stability in the headcount sequentially as you have that optimism, or do you expect to continue to prune a little bit there?

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

We didn't do a big production of highlighting certain areas where we, again, took the time and expense to clean up our Company a little bit. We wrote off a couple of Technology things during the period. We had $2 million of severance. We had the legal fees and things with the acquisition, but I think those things will normalize out, and I think we think we have a very solid base especially with the stabilization of Corporate Finance restructuring to start to produce the numbers that we like.

Okay thanks for the color. That's all I have.

Next is Dan Leben with Robert W. Baird.

Thanks. Good morning. Within the Technology segment, could you talk a little bit about the pricing pressure in the cost of -- sequentially, the revenue was essentially flat from the second quarter but that EBITDA number dropped by $2 million.

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

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

Great. Thanks, guys.

Next is Joseph Foresi with Janney Montgomery Scott.

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

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

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

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

We really have the five drivers for our business, M&A, IPO activity, government investigations, litigation activity, and then, last but not least, bankruptcies and loan default. And we're seeing, in the last one in particular, we see the expectations for a lot lower number defaults given the liquidity in the market place.

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

The $40 million was in FLC.

I'm sorry. I apologize.

And we did replace that.

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

Personally, I think we are near the new normal for the bulk of the practice. There are pieces of the practice that still needs some work. Our health care practice, I mean, there's been a change in the number of turnarounds that -- without opportunities to pitch to because a lot of the hospital chains that are struggling, St. Vincent's in New York, they closed down. They're not putting as much into the turnaround as they have in the past, so that's where the big upside in the health care business is. That's why we right sized the health care practice. And looking at the services and how we can provide those services on a more profitable basis if in fact the turnaround in the large success fees associated with them are going to be fewer and further between going forward at least in the near-term. As it's been stimulus packages are where there's a lot more Medicaid dollars to go into those facilities to support the struggling ones for a longer period of time.

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

And you did see different sectors struggling and other sections doing well. Retail is starting to see a little pressure. Our retail restructuring practice is going to gain some momentum. As Jack said we see big opportunities overseas, particularly Asia and Latin America.

What percent of your business is retail?

We don't break that out. It's not a huge number. I would be wrong if I guessed it.

Okay thank you.

Dollarwise it's probably $20 million or something like that.

We'll go next to Scott Schneeberger with Oppenheimer.

Thanks. I just want to pick up on that $40 million of fall off in FLC that you're picking up. In response to that last question you took the main things, FCPA, Asia-US trade wars, and the financial crisis heating up, but could you take us a little deeper into those three, particularly the third one? Thanks.

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

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

Thanks. Just to clarify one thing on that. With regard to these large mortgage situations you are involved in, would you it's just a few very big ones or is it widespread where there's a lot of different litigations coming.

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

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

These things tend to run certain courses. You come in and you do certain investigations, you prepare for litigation or settlement talks and then depending on how they progress you move towards some kind of conclusion. I would say we're in some of these at the conclusion based at some of them are new activities were new classes of people feel that they have to try to access legal remediation for something that happened in a securities purchase or investment or things related to this. It's growing in absolute terms. Some of it I would say you're clearly in the second half of the ballgame. Others we're just starting.

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

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

Great thanks for taking my call.

We have time for one more question. We'll go to Kevin McVeigh with Macquarie.

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

The biggest factor in the with the acquisitions in Asia. We picked up several million dollars of SG&A with that.

Great. Not to belabor the fourth-quarter guidance, but should we assume EPS somewhere around the $0.47 or $0.54 with or without -- I know there's the third-quarter charge, but should we think about bottom line closer to the $0.47 or $0.54?

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

Great. Thank you.

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

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