Navigant Consulting Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.30.13 | About: Navigant Consulting, (NCI)

Navigant Consulting (NYSE:NCI)

Q2 2013 Earnings Call

July 30, 2013 10:00 am ET

Executives

Paul Longhini

Julie M. Howard - Chief Executive Officer, Director and Member of Executive Committee

Lucinda M. Baier - Chief Financial Officer and Executive Vice President

Analysts

David Gold - Sidoti & Company, LLC

Timothy McHugh - William Blair & Company L.L.C., Research Division

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Randle G. Reece - Avondale Partners, LLC, Research Division

Operator

Good morning, and welcome to Navigant's Second Quarter 2013 Earnings Conference Call. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this time. I would like to introduce today's speaker, Paul Longhini, Director of Investor Relations.

Paul Longhini

Good morning, and welcome to Navigant's Second Quarter 2013 Earnings Conference Call. We have posted our second quarter 2013 earnings release, as well as supplemental information about the quarter and an updated investor presentation on the Investor Relations section of our website.

Before I turn the call over to Julie Howard, Navigant's Chief Executive Officer, I would like to highlight the disclosure at the end of our earnings release for information about any forward-looking statements that may be made or discussed on this call. Please review this information, along with the company's SEC filings, for a disclosure of information that may impact subjects that we discussed this morning. We will be discussing one or more non-GAAP financial measures. Reconciliations to the most comparable GAAP financial measures are contained in the schedule to our earnings release.

I will now turn the call over to Julie Howard, Navigant's Chief Executive Officer.

Julie M. Howard

Thanks Paul, and good morning, everyone. With me today in Chicago to present Navigant's quarterly results is Cindy Baier, our Chief Financial Officer. Let me begin by noting we had a very strong second quarter. We generated exceptional RBR growth of 30% over prior year in our Healthcare segment and achieved 12% RBR growth in our Energy segment. Our Financial, Risk & Compliance segment also delivered stronger-than-expected performance for the quarter. Together, these gains resulted in a 5% year-over-year RBR increase to $189.7 million. Additionally, our adjusted EBITDA increased 40% over the prior year, as our margin improvement initiatives continue to take hold and produce positive outcomes. Importantly, we are very pleased to have grown our second quarter 2013 adjusted earnings per share 48% over the prior year.

Our results in the quarter, as well as for the first half of the year, reflect a solid client demand environment for our capabilities, most notably in our Healthcare and Energy practices. Additionally, our results during the first half also reflects a longer-than-expected wind down of our work on the mortgage servicing review engagements terminated as a result of the settlements we discussed last quarter. The favorable revenue impacts from the wind down of these engagements will not continue into the second half of the year. As a result and in consideration of other factors, including the recently announced sale of our U.K. financial services business, certain work stoppages and deferrals due to press around the Moreland Commission report and underperformance against plan in our Economics practice, we are tempering our anticipated growth expectations for the second half of the year. Cindy will walk you through our full year outlook in more detail in her remarks.

So let me turn now to providing a bit of color on the growth catalysts for each of our segments in the quarter. We continue to realize good market penetration in our Healthcare and Energy practices, which represent high-growth businesses with clearly defined catalysts. We have a demonstrated ability to identify, develop and scale these businesses. RBR in our Healthcare segment has grown to over 25% of Navigant's RBR. This represents significant growth over the past 3 years, as the segment contributed 17% of our RBR in the second quarter of 2010. All aspects of the healthcare industry are evolving, driven by the Affordable Care Act and other regulations that are forcing payers, providers and physician groups to alter their strategies and business models. Life sciences companies are also being challenged to operate more efficiently, as they adjust to the realities of reduced reimbursements and enhanced regulatory focus.

Clients are coming to Navigant looking for solutions such as strategic direction for improving performance, a newly defined outcome-based payment models, cost-effective physician management structures, increased analytics and data for population health management and support in a consolidating environment. We're very pleased that we can help solve these critical issues for our clients.

Similarly, we're also pleased with the growth of our Energy segment, which represented 13% of our second quarter RBR. Development of energy efficiency programs, uncertainties created by pending clean energy legislation, regulations and policies, emerging technologies, demand side management planning and implementation of the smart grid are just some of the changes that continue to transform the energy sector and drive demand for Navigant's expertise.

While we're discussing our Energy practice, let me make a few comments regarding the release of the Moreland Commission report in late June, which raised potential concerns in connection with our work for Long Island Power Authority. The Moreland Commission referred its concerns to the U.S. Attorney's Office for investigation, and we are fully cooperating with that investigation. As we previously disclosed, we were not given any notice of the contents of the report nor an opportunity to explain any of the items raised in the report before the report was issued. We believe the concerns raised in the Moreland Commission's report to be without merit and are confident in our business practices and look forward to the opportunity to present our position to the U.S. Attorney's Office. Our reputation depends on strict adherence to the highest ethical standards in everything we do, and we are committed to maintaining and defending our strong reputation among our clients, our employees and our shareholders.

While we anticipate some near-term demand implications related to the recent publicity stemming from this report, which I alluded to earlier and Cindy will address in more detail, we are confident in the longer-term prospects for the business and view energy as a cornerstone of our long-term growth strategy. In addition to the strong performance in the health and Energy segments, we continue to benefit from the diversity of our deep capabilities to serve the financial services sector from both our Disputes, Investigations & Economics segment, as well as our Financial, Risk & Compliance segment.

Within our Disputes, Investigations & Economics segment, the market for expert testimony and eDiscovery solutions and highly complex Disputes and Investigations remains active with continuing need for our services in mortgage-related disputes, international arbitrations, securities and financial litigations and valuation dispute. Also within this segment, healthcare-related compliance and investigation activity is growing, driven by increased enforcement and regulation. In early July, we acquired the Anson Group, a regulatory consulting firm focused on helping clients navigate the federal and global regulatory and compliance requirements of life sciences companies. This business will become a part of the Disputes, Investigations & Economics segment but is very synergistic with our health business as well.

We also realized better-than-expected performance, as I mentioned, in our Financial, Risk & Compliance segment has increased activity in anti-money laundering, anti-bribery and corruption compliance and integrity monitorship, partially offset the longer-than-expected wind down of the mortgage servicing review work.

In combination, we are very pleased with our second quarter results on a stand-alone basis, and importantly, we are satisfied we are demonstrating progress against our strategic vision of a more efficient, collaborative and innovative organization focused on accelerated, sustainable and profitable growth for the long term. Our vision is based on a key objective to capitalize on both businesses in high-growth sectors such as our Healthcare and Energy businesses to provide greater contributions over time to our overall platform.

To achieve this, we will continue to invest in tools, technology, people and potentially acquisitions that can accelerate growth by leveraging Navigant's platform. Provision also includes building a complementary, optimized mix of businesses with a greater focus and contribution from those offering reoccurring revenue potential in order to provide more consistency and visibility for Navigant. As an example, during the second quarter, our Alleviant business, which offers a wide range of billing and collection services to health systems that employ physicians and independent physician organizations, added 80 new employees to support new outsourcing engagements we have secured. Also, as demonstrated by the recent sale of the London-based portion of our financial services business in early July, we also won't hesitate to shed nonstrategic assets as we optimize our business mix. This U.K. business focused primarily on retail distribution strategies, and we concluded that it wasn't synergistic to our broader financial services capabilities and didn't represent a good financial fit for Navigant. We remain committed, however, to our broader global financial services clients, which represent an important sector of our total client base for Navigant.

Profit maximization and margin enhancement through greater organizational focus is another key element of our longer-term strategy. Over the next several years, we plan to move Navigant forward and realize enhanced growth in both top and bottom line through a combination of organic growth, driven by initiatives such as our sales enhancement program, emphasis on collaboration, staffing leverage and innovation, as well as through inorganic growth via potential strategic acquisitions, which could bring new capabilities into our organization and help us expand our geographic scope.

Innovation will be at the core of how we will continue to grow our platform. As an example of our company-wide focus on innovation, we are growing out several new programs to excite and engage our professionals and creative ideation. We've established an ideas portal, as well as developed a quarterly innovation challenge competition and a shark tank-like business investment exercise for cross-collaboration opportunities. We are evolving our culture, as we speak, to promote and reward new ideas to drive the future business development of Navigant.

To me, it's clear we've made significant strides in the second quarter towards realizing our long-term vision for the company. Ultimately, the success of our strategy relies on us being able to perform, to bank and to innovate simultaneously, and I'm pleased with the progress we've made thus far. Moving forward, we plan to continue to execute on this stated strategy.

I'd like to turn the call over to Cindy now for a deeper dive into our financial performance and outlook for the balance of the year. Cindy?

Lucinda M. Baier

Thank you, Julie. Good morning, everyone. Navigant professionals are relied on to solve critically important issues for our clients. Increased demand for our services in the second quarter is reflected both in RBR growth, as well as a meaningful improvement across all our company-wide profitability metrics for the period.

For the second quarter, our RBR increased 5% to $189.7 million compared to the same period last year. Segment operating profit totaled $68 million, a 9% increase year-over-year. Overall, our segment operating margin was 36%, which increased 160 basis points from the same period of last year. Our abilities to develop and scale our businesses in high-growth markets, a key component of our long-term vision for the company, is highlighted by the performance of our Healthcare and Energy segments during the quarter. I will talk more about the performance of these businesses in a few minutes.

General and administrative expenses for the second quarter were $32.6 million, a 9% reduction from the second quarter last year. Our improved G&A performance for the quarter is a reflection of efforts this year to strongly manage our overall cost, as well as to align our investments with key growth opportunities. Our primary areas of G&A reduction were information technology, legal, bad debt and facilities costs. We expect to benefit from some of these cost reductions in the future, as we continue to make progress towards our adjusted EBITDA margin objective. Having said that, we do expect to see a sequential increase in G&A between the second quarter and the third quarter, which will continue into the fourth quarter, as we're expecting our bad debt expenses to return to historical norms, and we see some of the timing benefits that we experienced in the first quarter reverse.

Adjusted EBITDA increased 40% from the same quarter last year to $34.1 million. On a year-over-year basis, adjusted EBITDA margin grew 450 basis points to 18%, driven by improvement in our segment operating profit margin, as well as the reduction in the G&A expenses I just mentioned. Margin improvement is a key part of Navigant's perform, bank and innovate strategy, and we are pleased with our adjusted EBITDA margin performance for the quarter.

For the full year, we expect adjusted EBITDA margin in the 15.5% to 16% range, which is consistent with our prior guidance. Our full year margin outlook reflects an anticipated decline in RBR between the second and third quarter, while many of our practice costs remain consistent. In addition, we expect to see reversals of some of the timing benefits in G&A expenses that we achieved in the first quarter.

Our effective tax rate was 43.3% in the second quarter compared to 41.5% in the same period last year. During the quarter, we established a reserve for some foreign net operating losses that increased our effective tax rate for the quarter. Our net income increased 46% to $14 million in the second quarter compared to $9.6 million in the same period last year. Adjusted earnings per share increased 48% to $0.31 for the quarter compared to $0.21 in the same period last year.

Now let's look at our performance by individual segment. Our Healthcare business continues to grow at a very healthy pace, and it represented 25% of Navigant's second quarter RBR versus 20% at this time last year. Healthcare RBR for the second quarter increased 30% on a year-over-year basis to $46.8 million with approximately 65% of the growth being organic. We achieved strong growth in our strategy consulting, life sciences and performance improvement practices. We continue to see significant demand related to payment reform, the Affordable Care Act and to Medicaid managed care.

Healthcare segment operating profit for the second quarter increased 58% on a year-over-year basis to $18.1 million, reflecting strong RBR growth. While segment expenses, most notably compensation costs, grew at a lower rate. Segment operating margin increased 690 basis points on a year-over-year basis to 39% in the second quarter of 2013, reflecting the cost benefits of scaling this business.

Moving to energy. Energy RBR for the second quarter was up 12% for the same period last year to $23.8 million and represented 13% of Navigant's second quarter RBR. Approximately 60% of Energy's growth was organic. The growth in Energy was driven by strong demand for energy efficiency consulting, as a continued focus on reducing energy consumption was driving utilities to expand energy efficiency program. We saw strong growth in Navigant Research, including benchmarking services.

Energy segment operating profit for the second quarter was up 8% on a year-over-year basis to $8.1 million. Segment operating margin decreased 110 basis points to 34% as a result of investments that we made in our technology, data and process business, which includes Pike, which is also an acquisition that we made last year but is currently included in Navigant Research. We did receive notices that suspended our work for the Long Island Power Authority and the New York Power Authority. These notices did not have a material impact on our second quarter results. However, as I will discuss as part of our updated 2013 outlook, they do present a headwind for the Energy segment RBR in the second half of the year.

Financial, Risk & Compliance segment RBR for the second quarter of $42.7 million was even with the prior year and represented 23% of Navigant's second quarter RBR. Segment results exceeded our expectations for the period on the strength of a greater-than-anticipated contribution from the mortgage servicing review work, as well as from the significant activity in our regulatory compliance work during the second quarter. While segment results were better than expected, they were still constrained by the settlements, which terminated 3 large mortgage servicing review engagements in the first quarter of 2013 by, softness in the restructuring market and the underperformance of the U.K. portion of the financial services business, which was sold in July. Segment operating profit for the second quarter increased 7% from the same period last year to $16.4 million, driven by strong cost control. Segment operating margin increased 250 basis points on a year-over-year basis to 39%.

Moving forward, we still expect a decline in the Financial, Risk & Compliance RBR in the near term related to the wind down of the remaining mortgage service review engagement that is expected to be completed during the second half of the year.

Additionally, near-term segment performance is expected to reflect the impact of the recent disposition of the U.K. financial services business. We are now anticipating an RBR decline for the segment in the low double digits for 2013 versus our prior forecast of a 20% decline for the year. We believe that the segment is well positioned for growth over the longer term, as opportunities emerge from evolving business regulatory requirements such as Anti-Money Laundering, Dodd-Frank, EPCA and from anticorruption regulations such as the Foreign Corrupt Practices Act.

Disputes, Investigations & Economics second quarter RBR of $76.4 million decreased 6% when compared to the prior year quarter. The decrease was primarily in the Economics practice, including an impact from the first quarter disposition of a portion of the practice. Revenue contributions from the AFE Consulting acquisition partially offset the decline. We are expecting modest sequential improvement in the Disputes, Investigations & Economics segment RBR into the third and fourth quarters, as our project pipeline improved, and we were able to increase the revenue generation from new and recently hired professionals.

DI&E represented 40% of Navigant's total second quarter RBR. DI&E's segment operating profit for the second quarter was down 9% on a year-over-year basis to $25.4 million. Segment operating margin decreased 110 basis points on a year-over-year basis to 33% due to realigning our professionals with the stronger part for the market and as a result of the pricing pressure from a large client.

Excess fees for the second quarter were $1.1 million, a $3.7 million decrease, primarily in the restructuring area as compared to same period last year. We generated $24.4 million of free cash flow during the second quarter of 2013. This was a 15% increase over the same quarter of last year. Our free cash flow as a percentage of RBR was 13% for the quarter. We used $7.5 million of cash to repurchase 579,694 shares of stock during the second quarter. On average, we paid $12.85 per share. Based on current conditions, we continue to believe that stock repurchases are the most effective way for Navigant to return cash to our stockholders while allowing us to invest in organic growth, pursue strategic acquisitions and reduce debt.

During the second quarter, we repaid $36.5 million of bank debt. At the end of the quarter, we had $128.1 million of bank debt outstanding. Our leverage ratio was 1.03x. On a year-over-year basis, we have reduced our bank debt by $39.6 million, and we have reduced our leverage ratio by 36%. We invested $2.1 million in capital expenditures during the quarter, primarily for technology investments in our technology, data and process businesses, as well as our overall technology infrastructure.

In sum, Navigant enjoys healthy cash flows and a strong balance sheet that provides us with the financial flexibility to capitalize on future opportunities as appropriate. Let's turn now to our 2013 guidance. We are coming off a solid first half of the year and remain very excited about the long-term prospects for our business.

As we move into the back half of the year, we expect continued momentum in our Healthcare segment with double-digit RBR growth that is expected to be consistent with the segment's performance to date this year. Additionally and as I discussed already, we've improved our outlook for our Financial, Risk & Compliance segment. Our current outlook is for a low double-digit RBR decline, which represents an improvement from our prior outlook of a 20% decline. We are pleased that our mortgage servicing review work continued at a higher level than we expected and that our regulatory compliance work, including Anti-Money Laundering and the Foreign Corrupt Practices Act, has expanded. This improvement is partially offset by the impact of a disposition of the U.K. financial services business at the beginning of the third quarter. As the U.K. portion of our financial services business is not meeting our margin expectations prior to sale, we expect the disposition will have a larger impact on RBR than it will on profitability. For the Energy business, we have reduced our 2013 growth expectations to high single-digit growth as we work through disruptions on a few projects.

We are proud of the work that Navigant has performed for its clients, which we believe has translated into long-term, trusted relationship and a strong brand. We have confidence in our professionals, and we look forward to the future. We have reduced our expectations for the Disputes, Investigations & Economics segment to reflect the slow ramp in the Economics practice that we acquired last December, as well as some pricing pressure from a large client and some unanticipated attrition. We are currently expecting an RBR decline in the high single digit.

Taking all of these factors into consideration and having just completed the first half of the year, we're updating our full year guidance and providing a narrow range for RBR of $740 million to $770 million. Additionally, we expect $820 million to $850 million of total revenue. Our outlook for adjusted EBITDA is $115 million to $120 million. Our EBITDA margin for the year is expected to be in the range of 15.5% to 16%. We estimate adjusted earnings per share will be between $0.95 per share and $1.05 per share. We're expecting strong free cash flow of $70 million to $80 million. We estimate year-end 2013 debt of $110 million to $120 million, which is about 1x our projected EBITDA.

Under Julie's leadership, Navigant is assembling an improving track record of execution, growth and fiscal discipline as we position the business for a long-term sustainable growth. We're investing in promising new markets, and we will consider opportunities, both internal and through acquisitions, to enhance our strategic positioning. We're also taking the steps necessary to optimize our business mix and shed nonstrategic assets as we demonstrated with the sale of the U.K. business following the close of the second quarter.

To conclude, I'm very pleased with the financial health of the business and the progress the company is making towards the strategic objective. Navigant team is focused on moving the company forward while serving the interest of our clients, our professionals and our stockholders. And with that, I will now turn the call back over to Julie.

Julie M. Howard

Thank you, Cindy. We believe we're on the right path to deliver on our long-term vision for Navigant. I want to take this opportunity to especially thank our clients, our shareholders and our 2,500-plus professionals around the world for their contributions to our success. I look forward to updating you on our progress in the next quarter. Now we'll open it up for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from David Gold of Sidoti.

David Gold - Sidoti & Company, LLC

I was hopeful for a little bit more color on the Energy business and sort of the changing guidance there. Obviously, it sounds like it's a mix of things. But can you give a sense for how much business or, let's say, how much of the changing guidance was related towards work stoppage related to the Moreland Commission report?

Julie M. Howard

It's a good portion of it, David, going forward into the second half. As I mentioned in my remarks, we've had some work stoppages. We've had a few deferrals. And I think probably, importantly, what we don't know are the opportunities that may not be coming our way until we've kind of cleared of this overhang. So that's part of it. As I mentioned in the first quarter, our renewables practice has been down as well, and that's just because of the shift in Obama's policy focus. And we also saw a little bit of softness in our research business going forward, which we expect is just part of the maturation of that business and that'll turn, so predominantly related to the Moreland Commission report.

David Gold - Sidoti & Company, LLC

Okay. And in -- that business also helped also -- sorry, headcount, down sequentially. Was that targeted? Or did you have some departures there?

Julie M. Howard

No, we've had some targeted attrition, I guess, is the way you might call it, not unexpected and have just kept that out there for the full year, we would expect to be back up somewhere between 5% and 7% overall for the whole firm by the end of the year.

David Gold - Sidoti & Company, LLC

Got you. Okay. One other question, obviously, probably a little bit sensitive, but there were some headlines out there that suggested that the company had disclosed that you have been contacted by the federal prosecutors on the Moreland Commission report. I was curious just if there's any more color that you can add on that to the extent that you can say.

Julie M. Howard

I mean, that is true that we have been contacted, and I said that we're working to be supportive in the investigation and to address the U.S. Attorney's Office in the near future.

David Gold - Sidoti & Company, LLC

Got you. But we don't have a timeline on that, do we?

Julie M. Howard

We do not.

Operator

Our next question comes from Tim McHugh of William Blair & Co.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Just a quick follow-up on that. It seems that the guidance for the year implies energy kind of flat sequentially in the second half of the year, so you mentioned some headwinds, but I guess there's a trade-off there, and you're expecting underlying growth to -- in the rest of the business to offset that. Is that a fair way to, I guess, think about it?

Julie M. Howard

Yes, that is a fair way because the rest of the business has performed well. There's been a renewed focus with Obama's new climate initiative to focus on energy efficiency. So the rest of the business remains strong, and we're just tempering our guidance a little bit because of the uncertainties, I guess, that we could say around potential headwinds in Energy.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay, great. And then I guess, just turning to the Financial, Risk & Compliance, can you elaborate about what happened with the large mortgage contracts? Did they just, I guess, the end date or the stop date and the ones that hadn't settled lasted longer than you thought, but that end date has now come? Is that fair?

Julie M. Howard

Yes, I mean, essentially, it just took longer to wind them down at the direction of the regulators, the types of things that they were asking us for. So I think we completed 2 of them in the first quarter, but we had one 1 continued forward in the second quarter. And we expect our fourth one then to wrap up in the third quarter.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay. And just on disputes, can you elaborate a little more? You made a comment in the prepared remarks about the pipeline, I guess, improving and expecting a little better performance in the second half of the year. Can you just -- what are you seeing, I guess, out there that looks a little better if you can pinpoint it?

Julie M. Howard

Yes, I mean, we are. As we mentioned, if you look at the whole disputes segment, it's predominantly some softness that we had in the Economics practice as we expected AFE to maybe ramp a little bit faster than it did. But looking at the broader disputes environment, we feel good about just general commercial litigation. Our international arbitration business remains very busy and growing each and every year. Securities and clearly, the financial litigation mortgage-related dispute work has been a driver of our business for many years and that remains. And I think the potential upside for us really is in the forensics accounting and investigations area. We have a new Chairman, and most of the heads of the enforcement groups within the SEC have -- all bring prosecutorial background. And they've -- many of them have stated their intent to focus more actively on financial reporting issues. They also just recently announced the formation of a financial reporting and audit task force, which we think will expand and strengthen our effort to focus on securities law violation, which is, of course, a strength of ours. So that kind of coupled with their use of technology, as well as the whistleblower provisions within Dodd-Frank, which create more incentive, we think all of that bodes well and is a good indication of a catalyst for opportunity in the Disputes and Investigations arena.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay. And I guess, if we just look at disputes, if we stripped out, I guess, the divestiture, as well as the AFE acquisition, excluding I guess, in general, the Econ area, are you flat? Are you up? I don't know if you've looked at it that way, but I guess trying to get a sense for excluding the -- some of the changes in Econ, what the underlying revenue would look like for the business.

Lucinda M. Baier

Tim, this is Cindy. If you look at the Disputes, Investigations & Economics section, and you strip out Economics, the business is down slightly. Recall in the first quarter, we had a large investigative matter that was very strong last year that had ramped down. The project came to its natural conclusion. We have a large high-volume client in the segment that we've made some pricing concessions to. And then we've had some attrition in the business, as well the technology business is a little slower growth than we expected it to be.

Operator

Our next question comes from Joseph Foresi of Janney Montgomery Scott LLC.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

My first question is on the Healthcare side. How does the pipeline look in that business? And have you seen any impact from sequestration? What should we think about growth rates there over the long term?

Julie M. Howard

So the question is relative to Healthcare, we have a very strong pipeline. Healthcare is our largest -- or our fastest-growing segment within the business, and we would anticipate that will continue, Joe. And there has been no impact to the health business from sequestration.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Okay. And then on the margin front, it seems like over the last, lets say, 6 to 12 months, you got rid of some businesses that are potentially low in margin, a couple of consultants that you let go to a competitor and then now this U.K. business. Do you feel like there's more potential divestitures that could help you reach that long-term margin target? And they're just part of your strategy to kind of reevaluate the profitability of the business now that you've had some time to look at it?

Julie M. Howard

It is, Joe, and I do anticipate that there could be other small portions of the business. Often when you grow, you end up developing certain businesses that may be fringe or don't -- aren't necessarily synergistic to the whole, which is exactly what will happen with our U.K. financial services business that was, on its own, I think, solid in the U.K. market relative to that particular retail distribution strategy brand. But it wasn't connected. There was no connective tissue to the rest of the organization, and it didn't meet our margin goals. So there may be a very small number, 1 to 2, other businesses that, should that profile that we may jettison in the future, as we also continue to focus on our high-growth channels at the same time.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Got it, okay. And then on the bad debt expense, why did that go down this quarter? And why would it increase again next quarter?

Julie M. Howard

I'll let Cindy take that one.

Lucinda M. Baier

So bad debt expense was impacted by the collection of receivables that had reserves against it. We've had very favorable performance in bad debt expense in both the first and second quarters, and that's generally consistent with our improvement in our DSO for the business. We expect our bad debt to return to more normal levels in Q3 and Q4 so still having strong performance but just not quite as strong as during the first half of the year.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Okay. Was that associated with one specific account? I'm just wondering why you evaluated it at this point.

Lucinda M. Baier

No, it was associated with a group of accounts, but you can think about it in terms of higher risk receivables that were collected during the first half of the year.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Got it. Okay. And then, last one for me, I know you've given some long-term targets on the margins, I'm wondering has there been any new change in any of your views that you've given sort of a goalpost for what you expect here on the gross side or margin side for the business.

Julie M. Howard

Have there been any changes? No. I think we would just reaffirm the longer-term growth and margin targets that I've been talking about for the last year, Joe.

Operator

The next question comes from George Sutton of Craig-Hallum.

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

Most of my questions have been asked, but I was curious on the international business in particular. Outside of the specific piece of the business that you're selling, how did the rest of the business do because it did look like international was pretty weak?

Julie M. Howard

I wouldn't call it weak, George, but it probably had less of a stellar quarter than we would have liked. We did experience, we referenced the attrition within the disputes business. That is predominantly what you're seeing reflected in the international results and that we lost some senior people in our disputes and our legal tax business within international. Having said that, we also have a construction, a large construction disputes business which has continued to perform well into the year, and that's expected to go forward.

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

Okay. And Julie, I wondered if you could give us a little more detail around the idea portal and some of the tools and technologies you're trying to bring. Intrigued to understand how an employee would use that and how the firm might benefit.

Julie M. Howard

Yes. Well, there's several things that we're doing on the innovation front, George, and all of it is meant to increase the culture of innovation here where people -- we give them the tools, and we give them the incentives, and we give them the runway to develop ideas, notably, I think our younger professionals who probably have more, better ideas about where the businesses is headed in the future than some of our senior people. And that's not to be a discredit. It's just, I think, in that environment. So we want to give them as many as tools and opportunities. Ideas portal is simply that, a way for them to kick out quickly ideas to our Innovation Development Council and to Lee, head of our businesses, who's kind of evaluating those. But in a more focused fashion, we have developed this innovation challenge, which is done on a quarterly basis, and it's not for individuals. It's meant for teams of 4 people to put their heads together. We pose specific questions, 2 per quarter, and the groups around the firm can present ideas as to how to address those challenges. And there are winners, and there are incentives for the winners. And then the last, which is fairly significant, which is a shark tank-like business exercise, business investment exercise for senior professionals, which will happen in the fourth quarter. But again, all of these is meant to promote future thinking about our business and our opportunities.

Operator

Our next question comes from Tobey Sommer of SunTrust.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Within the Healthcare segment, could you describe the areas, if there are, particular areas of concentration in terms of the -- where you're seeing the best demand? Is it public company hospitals, rural, smaller healthcare institutions? Any color you could give there would be great.

Julie M. Howard

You know, Toby, I mean, I think the entire provider system, whether it's for profit or not for profit, academic, medical centers, what have you, are experiencing turmoil in a variety of different forms from the healthcare reform that we've seen. So we're seeing it from a provider base, when you think about the reductions in reimbursement rates that are entering to the providers, they're faced with figuring out how to have increased revenue and reduced costs, so we're working with them on performance improvement. Our strategy division of our Healthcare practice has been working very closely on a number of opportunities with commercial and government payers. Also related to payment reform, helping them with concepts of bundling and quality incentives, we've also been working on developing health insurance exchanges, as I've mentioned in the past, and Medicaid managed care. What else can I tell you? Population health, which is a new kind of concept that's emerging out of this, which is essentially individuals and companies thinking about how they can take responsibility for managing the health of a defined population. That's another market trend that's connected to the accountable care organization reforms, and that's starting to drive opportunity. And then, clearly, there's been increased consolidation and a lot of discussion around provider systems combining provider physician practices combining and the like, and so we've been active in helping on that regard as well.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

As a follow-up, I'd just ask one other question. I'll get back in the queue. Did the postponement of the penalties at the earlier part of this month, pushing out until the end of next year rather than this year, did that impact anything that you saw in terms of your customer behavior?

Julie M. Howard

Penalties, Tobey, can you be more specific?

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Oh, yes, within the Affordable Care Act pushing the penalties for large companies out until 2014 instead of 2013 that's relative [ph] ?

Julie M. Howard

No, there's been no impact, no change.

Operator

Our final question comes from Randy Reese of Avondale Partners.

Randle G. Reece - Avondale Partners, LLC, Research Division

I was just looking at my expectations for headcount growth in the second half of the year. The increases in technology data and process were more than I expected, and the consulting headcount came in a little below where I was, although the end of quarter numbers look different than the averages. Do you have any changes in trajectory as far as hiring goes?

Julie M. Howard

Well, as I mentioned, we'll probably be up 5% to 7% by the end of the year, and that will probably predominantly be in our consulting side. The increase in technology data and process, as I mentioned in my remarks, was driven by hiring an additional 80 people to support our Alleviant business, which is the business that provides billing and collections, outsourced processing for provider and physician management groups. And we've secured additional long-term contracts and feel good about the growth and development of that business. So that's where we added the people. I would anticipate that the additional growth that you're going to see is going to be on the consulting side in the second half.

Randle G. Reece - Avondale Partners, LLC, Research Division

Okay, that makes sense. Got it. I was a little bit unclear about the message on Disputes, Investigations & Economics. Did you say you had somewhat reduced the full year expectation for that segment even though it sounds like you expect sequential improvement?

Julie M. Howard

Yes, go ahead, Cindy. Go ahead and...

Lucinda M. Baier

That's correct. In the last call, we basically said that the Disputes, Investigations & Economics segment would be down in the low single digit. We've raised that to being down in the high single digits. Just a reminder, the first quarter was down 15.6% on an RBR basis, and that improved on a year-over-year basis to just down 6% in the second quarter on a year-over-year basis. So the performance is improving as the year goes along.

Randle G. Reece - Avondale Partners, LLC, Research Division

Okay. And we keep thinking about some changes going on in Washington that might actually have an effect on you. But as we stand here in July more than halfway through the year, is there still a possibility you could have any material impact in regulatory activity in Washington? Or are we really talking about 2014?

Julie M. Howard

I would imagine we're probably talking about 2014 but we have to recognize, Randy, that you -- we're in the process of budgeting season, right, for the federal government work, which are typically re-upped and rebid at this time of the year. And so whenever you're doing that, you always have, I suppose, somewhat of a risk. But we feel comfortable and have built that into our outlook.

Are there any other questions in the queue?

Operator

There are no further questions.

Julie M. Howard

All right, thank you. Appreciate everybody joining our call today, and thank you. We look forward to talking to you on the next quarter.

Operator

This concludes today's presentation. Thank you for your participation. You may now disconnect.

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