FTI Consulting's CEO Discusses Q2 2011 Results - Earnings Call Transcript

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FTI Consulting (NYSE:FCN)

Q2 2011 Earnings Call

August 04, 2011 9:00 am ET

Executives

Jack Dunn - Chief Executive Officer, President and Director

Roger Carlile - Chief Financial Officer and Executive Vice President

Mollie Hawkes -

Dennis Shaughnessy - Executive Chairman

David Bannister - Executive Vice President and Chairman of North American Region

Analysts

Jeffrey Rossetti - Janney Montgomery Scott LLC

Paul Ginocchio - Deutsche Bank AG

Daniel Leben - Robert W. Baird & Co. Incorporated

David Gold - Sidoti & Company, LLC

Tobey Sommer - SunTrust Robinson Humphrey, Inc.

Scott Schneeberger - Oppenheimer & Co. Inc.

Arnold Ursaner - CJS Securities, Inc.

Kevin McVeigh - Macquarie Research

Timothy McHugh - William Blair & Company L.L.C.

Operator

Good day, everyone, and welcome to the FTI Consulting Second Quarter 2011 Earnings Conference Call. As a reminder, today's call is being recorded. And now for opening remarks and introductions, I would like to turn the conference over to Ms. Mollie Hawkes. Please go ahead, ma'am.

Mollie Hawkes

Good morning, welcome to the FTI Consulting conference call to discuss the company's 2011 second quarter results as we reported this morning. Management will begin with formal remarks, after which, we'll take your questions.

Before we begin, I would like to remind everyone that this conference call may include forward-looking statements, within the meaning of Section 21 of the Securities and Exchange Act of 1934, that involves uncertainties and risks. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues, future results, performance expectations, plans or intentions, business trends and other information 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 these contemplated by forward-looking statements, investors should review the Safe Harbor statement in which earnings press release issued this morning. A copy is available on our website at www.fticonsulting.com, as well as disclosures under the heading Risk Factors and Forward-Looking Information on our most recent Form 10-K and in our filings with the Securities and Exchange Commission. Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this earnings call.

During the call, we will discuss certain non-GAAP financial measures, such as adjusted EBITDA, adjusted segment EBITDA and adjusted earnings per share. For a discussion of these non-GAAP financial measures, as well as a reconciliation of these non-GAAP financial measures to the most recently comparable GAAP measures, investors should review the press release we issued this morning.

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

Jack Dunn

Thank you very much, Mollie. Good morning to everyone and thank you for joining us. With me are Dennis Shaughnessy, our Chairman; Roger Carlile, our CFO; and David Bannister, the Chairman of our North American region. In response to our discussions with the over the last couple of weeks in a survey we did, we are going to keep our prepared remarks to a minimum this morning. There are a couple of things that I'd like to give you as potential takeaways from the quarter, but we want to leave as much time as possible for your request for questions and drilling down on the issues that are really jugular to you.

I would ask you to remember that the goal of FTI was to be the #1 firm that people turn to worldwide for solutions to the jugular issues that affect their wealth, their reputation and indeed their very lives. Our strategy, or if you will, our value proposition was to attract, hire, acquire, and most importantly, retain the best talent in the world to help clients identify those jugular issues, devise value-added solutions and then deliver them locally through the last model of execution in a timely effective, thorough, seamless and cost-efficient manner. I think that this was a significant quarter in validating that strategy and in achieving that goal. And I would like to give you a couple of things to think about in terms of the quarter.

The first was that this was an excellent quarter. The company grew 15% as a whole. Second, our pro cyclical businesses as a whole are more than gaining traction. They are strong, with 3 of them having excellent results. Third, our activities outside North America are also very strong. Four, with the steps we've taken in the quarter, we believe we are at or near the bottom of the market for our Corporate Finance/Restructuring activities. Five, our financial position is strong. And six, we are reaffirming our guidance.

With regard to the quarter, revenues rose 15% to a record $400.4 million, the highest quarterly revenue in the history of the company and our second consecutive quarterly record. Adjusted earnings per share for the quarter excluding the special charge were $0.64, up 23% over adjusted EPS in the second quarter last year, when there were no special charges. Adjusted EBITDA was 16.6% of revenues, which included the ramp-up expenses of our newly acquired LECG professionals as they began to get traction.

With regard to our pro cyclical businesses, as a whole, they grew 25%. And the organic growth for these businesses was a robust 16%. The delta represented growth from the LECG transactions, which are more than on plan. Highlights in the pro cyclical businesses were 46% revenue growth in Economic Consulting, of which 18.5% was organic; and 33% revenue growth in Technology, all of which was organic; Forensic and Litigation Consulting grew revenues at 15%, 9.5% of which was organic; and Strategic Communications grew revenues at about 7.5%, though much of this was due to foreign exchange.

With regard to activities globally, revenue outside the U.S. this quarter was $102 million or 26% of our total activities, both are all-time records.

Revenue in Europe, Middle East and Africa grew 52% compared to the prior period. And 20% of this growth was organic, reflecting improvements in our Economic Consulting, Forensic and Litigation Consulting and Strategic Communications segments.

Total revenues in Asia-Pacific nearly doubled compared to last year, 40% of which was organic revenue growth with strong organic growth in Forensic and Litigation Consulting and Strategic Communications. The remainder represents the excellent acquisition we did and the turnaround in consulting business late last year.

Latin America's revenues grew 48% year-over-year, 26% of which was organic. Although Latin America is still small relative to the rest of the FTI's businesses, these results signify the dynamic market opportunities for FTI in the region, as their quarterly results continue to follow a rapid growth trajectory.

With regard to our Corporate Finance/Restructuring business, we, and more importantly, professionals in that business, believe that is at or near its bottom. The last couple of months have seen some firming in the core practice, and we took significant action in the quarter to both position business for the low levels of core restructuring we are currently experiencing and in anticipation of different areas we expect to grow. Most importantly, new leadership took the helm in Corporate Finance/Restructuring business, and we took steps to strengthen our Transaction Support business in anticipation of the resumption of a vibrant financing market in the back half of the year.

With regard to our financial position, after funding the accelerated stock buyback and the acquisition and ramp-up expenses of the LECG transactions, we have $99 million of unrestricted cash and no borrowings on our $250 million revolving credit line. While our operating cash flow in the quarter was $26.4 million compared to $49.2 million in the prior year's quarter, this decline was primarily a result of a decline in core U.S. restructuring in the Corporate Finance/Restructuring segment and the shift in some of its business to Asia, as well as this dynamic growth in our Economic Consulting segment, including through the LECG transactions.

As a result of these structural changes in our accounts receivable makeup, our DSOs increased by 19 days as compared to the second quarter of 2010. On further diagnosis, about 4 days of this change were related to the presence of our business in Asia, where traditionally or historically, payment has been slower, 4 were due to the decrease in our core restructuring activities and 6 were due to the tremendous growth in our Economic Consulting business, which has always had receivables that were the longest the company, and then 1 or 2 extra days were from receivables that we acquired in the LECG transaction again, which historically had a longer time.

If these trends continue with record results in econ and a flat or declining restructuring, we will have effectively had a onetime investment of additional cash in the working capital of our business. Regardless of this, our cash collections for the quarter were excellent at approximately $347 million, and the current collection experience of accounts receivable has not changed materially. Therefore, we look forward to a strong cash flow from operations results in the remainder of 2011.

During the quarter, the company received and retired approximately 628,000 shares of its common stock pursuant to the accelerated stock buyback transaction entered in 2 of March of this year bringing the total number of shares received under this transaction to approximately 5,062,000. Under the terms of this transaction, the company may receive additional shares later in 2011 depending on the average price of the company's stock.

With regard to our outlook, we are enthusiastically reaffirming guidance. While our third quarter is typically seasonally lower than our second quarter, we are encouraged by the performance of all our businesses and our sustained global revenue expansion. As I said, we are reaffirming our guidance for the full year 2011 of revenues in the range of $1.5 billion to $1.54 billion and adjusted earnings per share of $2.30 to $2.45.

With that, we would like to open it up for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Paul Ginocchio with Deutsche Bank.

Paul Ginocchio - Deutsche Bank AG

Just in the quarter, could you talk about if there was any EPS impact to the LECG transaction? And then remind us how you think that ramps over the next 2 quarters. And then maybe the revenue from what -- what are you thinking about the revenue impact in the June quarter. Also from LECG.

Dennis Shaughnessy

We did about -- Paul, it's Dennis. We did about $23.5 million in revenue for LECG, which was higher than our initial expectation. I think what we had told was we thought were reporting over about on the low side, $60 million, to the high side, $80 million run rates. So clearly, we're a little higher than the high end of that run rate. We anticipated no contribution in the quarter from LECG because of really, the -- it wasn't a clean acquisition from the point of view of buying a company that was up and running. It was really sort of taking a wide assortment of segments out of a company and trying to quickly transition them physically into our operation. It did, however, report about a $0.02 contribution to us, which was clearly above expectations. We would anticipate that, especially in the Forensic and Litigation units, that the number of people that have been brought in there, which had a depressing impact on their margin for the quarter, would start to ramp up. And I think you'll see those contributions start to ramp up to where by the end of the year, they should start to mirror what our normal, traditional earnings contribution would be. And we would anticipate next year, that we would get 4 quarters that would look like the segments that the various groups have been integrated into.

Paul Ginocchio - Deutsche Bank AG

But based on that and just [indiscernible] calculations, it looks like that in back half of the year, LECG's going to add, I don't know, somewhere between $0.05 to $0.10. I just done that really quickly. Maybe I just don't understand the EPS guidance not going up if you're going to get that...

Dennis Shaughnessy

I think one, we would agree with you on LECG. But I think the thing that we have to be careful about is you're staring at the same screens that we are, and there is a lot of confusion of what's going to happen in both our major markets here and in Europe in the fourth quarter. And I think that clearly, what we've done is we'd look at the trends that we have. The trends continue and the macro environment stays where it is, we certainly have a chance to do better than the top end of our range. On the other hand, if the trends turned down, we could see a slowdown in the Europe. And we obviously have gotten much larger in Europe and we could see a slowdown here. And that would put us still in the range, but certainly not at the top all or above it. So I think...

Jack Dunn

Also, Paul, we did -- in our May guidance, we did update it for we thought the impact would be. So it's in there.

Paul Ginocchio - Deutsche Bank AG

Right, right. Okay, understood. I guess I thought maybe because of the slightly higher revenue that you might increase. I think I understand now with your outlook on the uncertain economy. Just, you talked about some management changes, and I think you talked about it when you issued the positive pre-announcement. Have you stated what was changed, who's left or the changes you made? And finally, when did you get the shares in the quarter, or just what's the outlook for the third quarter share count?

Dennis Shaughnessy

Well, we changed, as we had told you in the beginning of the year, we created a very large regional profit centers, given our anticipated growth in those areas, to more effectively control the go-to-market strategy and obviously the costs of that. Because of the implementation of that organization, we created certain redundancies in some parts of the organization to where either the individuals or the value of the individual contribution, we did not view it as sustainable going forward. So we made changes in Corporate Finance, in the top management. We made changes in Strategic Communications. And then we looked hard at some of the operations inside of Corporate Finance, given sort of the run rate that we're looking at right now, that now seems to be firming up. We took the opportunity to make some changes to align the personal complements there to what we see as the upside opportunities, specifically transactional support growing and what we anticipate the run rate on restructuring would be, again assuming that the economy that we're in right now doesn't change dramatically one way or another.

Paul Ginocchio - Deutsche Bank AG

Great. And then the shares?

Dennis Shaughnessy

The shares, we anticipate we will get one more delivery of shares. It's driven, as you know, by the price. I mean, obviously, an accelerated stock buyback is accomplished by very large short of your stock, and then the investment bank covered -- has a right to cover over a certain period of time, and then, they're delivering shares to us during that time. I think we would get one more delivery. And to give you a number, I'd be guessing.

Jack Dunn

[indiscernible] to share count.

Dennis Shaughnessy

Yes, I don't think it would have a major effect on the share count.

Paul Ginocchio - Deutsche Bank AG

I'm just thinking more about the Q-on-Q change, I don't know when you receive the shares in the June quarter, the 600,000.

David Bannister

When we stated that June, the shares we got in the second quarter, we got early in the second quarter. The weighted average shares were 42.5 million. There's 41.5 million outstanding now. And additional shares coming are late in the year, so that it was said that we'll have a material impact on the weighted average shares for the rest of the year.

Operator

And next with Tobey Sommer with SunTrust.

Tobey Sommer - SunTrust Robinson Humphrey, Inc.

If you gave this, I apologize, in your prepared remarks. But what was the organic rate of growth for the overall business sequentially excluding the contribution from LECG?

Roger Carlile

Yes. This is Roger Carlile. It was 6.2%, was the overall organic growth rate.

Tobey Sommer - SunTrust Robinson Humphrey, Inc.

And how do you think about, in this kind of environment, what should we think about in terms of the mix of contribution to organic growth between utilization and/or rate?

Dennis Shaughnessy

Well, I think #1, you have a negative contribution coming out of Corporate Finance because it's shrinking, so that's an anchor. I think, as Jack said, we feel we're at or approaching a bottom there. But rate is down in Corporate Finance, and demand is down, so the actual drag is a combination of both. In econ, clearly, they are extremely busy. And rate is not an issue, and utilization is not an issue. And we've, as you know, Tobey, has been having capacity there to reflect what we saw was an increase in demand. In tech, it's really not utilization-driven as much as it's demand for the technology and the services. And so that's a totally different explanation. I think in FLC, it would be a combination of both rate and utilization improvement. In FLC, they have to digest more people who came over without a substantial book of business porting over from LECG. Although we believe, given the activity that we're seeing those people involved in, that, that's going to change very quickly.

Jack Dunn

Yes. The growth in the quarter, and I would anticipate for the rest of the year, will be driven either by utilization or volume depending on a particular business. I think we're still in a rate-constrained world, much less our industry. So I think it's going to be because of the ability that we're seeing the improvement in the post cyclical, the volumes or in terms of the weigh up in technology. I mean, we're back to the -- knock on wood, that it seems that we're back to the halcyon days. So I think it's going to be -- this point in the cycle always starts with increases in your volumes and your utilization, and then rate follows.

Tobey Sommer - SunTrust Robinson Humphrey, Inc.

Right, okay. Two other questions. One, could you comment on the competition in tech? From what I can remember, kind of during the recession, we had at the early entry point of the funnel, some smaller market players kind of competing on price for market share. And then if you could also comment on, should we view the robust activity in the Economic Consulting segment as a leading indicator and a feeder to other segment's future revenue?

David Bannister

It's David Bannister, let me take the question on Technology, and I'll stick the econ question back to Jack. In Technology, there are some interesting things that went on during the quarter. We've had 2 acquisitions of some consequence in that space. One was a very nice small competitor called Clearwell. It was bought by Symantec. We think it was an order of magnitude, a $50 million business. And that would've been the type of company we've spoken about in the past, where they were very aggressive on price to gain market share or to gain entry. And now that's become part of a much larger company with a somewhat distribution strategy. The other transaction that went on was Iron Mountain sold their e-Discovery assets along with their hosting assets to Autonomy. Our understanding is that business was not particularly robust or growing business, but we really don't have a great deal of clarity. The competitive set is -- it really seems to be centering in on 1 or 2 other high-quality companies, Ontrack would be the most obvious one, which is part of a large leveraged buyout now. And it seems to do very well as they take a somewhat different approach than we do. They tend to be a very high-volume, one-size-fits-all company as opposed to more of a consulting [ph] company. And then a fair amount of still modest-sized service providers to the company. So the big 4 would have e-Discovery capability, using other people's technologies, and then a number of regional sort of providers. So I think we're start -- the long and short of that, I think we're starting to see the industry consolidate around a number of larger players. It's reaching a somewhat more mature level in the sense of how people are behaving in the market. And we think all of that is good for us, that we don't such irrational venture-backed companies that try to grow by using price as their sole way. Dennis, do you want to add something to that?

Dennis Shaughnessy

No. I mean, I agree with what David said. I think clearly, it's heartening to us to see the valuations that people are paying for smaller-sized companies with smaller earnings contributions, if any. I think it shows that a lot of the larger leaders in technology view this as a real growth opportunity. I think to your question on economics, I think it's really difficult to predict. I think clearly, the M&A activity is extremely robust. Our people are in sort of the vortex of it. There was a prediction by several investment bankers yesterday on one of the business channels that the anticipated decline of the dollar was going to trigger a lot of inbound M&A activity from Asia, which would have a currency arbitrage opportunity. So if that continues, Tobey, we would stay very busy. There are second request opportunities that are associated with this, that our Technology folks have a chance to look at. So that clearly could be beneficial to them, but it's very hard to tell, with the exception of Technology and special request, what other spillover effect would come from all of this competition activity.

Jack Dunn

Remember that they're typically involved on the M&A front and strategics work, which typically do a lot of their own due diligence and typically aren't involving a lot of outside financing. The more heartening thing is that with the debt crisis solved, ha-ha, it looks like that we have a more vibrant lending market in the back half of the year. So we're expecting the private equity funds to resume their really high level of activity. And that's the one that really reflects well on all of our businesses. So that's a very good sign for us as well.

Tobey Sommer - SunTrust Robinson Humphrey, Inc.

Right, Jack, because they're not heavily resourced and therefore have to lean on you a little bit more so?

Jack Dunn

Well, not so much that as the fact that they borrow money. So we have the banks. We do the due diligence. We have the Transaction Support, which we mentioned we're beefing up with adding some really spectacular senior folks. There are just a whole lot of things that we can do. And increasingly, they are also buying companies in their portfolio companies, which would involve our people in their approval process, either economist or second requests. And that just creates a lot of activity all around the block.

Operator

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

Timothy McHugh - William Blair & Company L.L.C.

First, I want to follow up on the LECG margin, if I could. Just based on the $0.02 of accretion, I'm kind of getting to a 6%, 7% margin for that overall LECG revenue. And if you said forensics was a drag, sounds like economic was...

Dennis Shaughnessy

Tim, it basically broke down that the econ side, which was predominantly Europe and South America, came in about where we would expect, which was pretty strong. The forensics, which was a more difficult transition over, we didn't expect to have a great quarter, although they're starting to generate very good activity. Overall, you're right, it was about 6% to 7%. And obviously, we would expect that to migrate not in 1 quarter or 2 quarters, but it'll migrate up to a more traditional margin.

Timothy McHugh - William Blair & Company L.L.C.

And so is the economics piece already at the margin you would...

Dennis Shaughnessy

Tim, I mean predominantly, it was -- yes, it's about 300, 400 basis points below what our traditional economic margin is, but still a healthy margin. And yes, we would anticipate that migrating upward again. If you remember the LECG transaction, there was a lot of business that ported over on their old comp model, and we allowed the people -- we didn't try to change things they were working on. We reflected our comp model and sort of the FDI way of doing business on the new things. And that's going to burn itself out through the system. Probably it'll all be out of the system in this coming -- quarter that we're in. So that's why I would anticipate you're going to see improvement across all of the LECG acquisition. And then just of nature of the transaction, trauma that the transaction had surrounding it, of sort of having to go in and grab these people out very quickly, put them in our organization, this is normal disruption. I think that's quickly dissipating. So I think they're operating now on a more normalized environment, and these are tough, light people that we were delighted to get. And we anticipate they're going to produce very similar results to our existing folks.

David Bannister

Timothy, I want to add to what Dennis just said about the people we got. Jack and Dennis and I and Roger have been out in the roads the last couple of weeks. We've been running. We're heading out to San Francisco next week and so forth. And we are thrilled with these people who came over. They're fitting in well. They're good folks. It really has been gratifying to see how all that has worked.

Timothy McHugh - William Blair & Company L.L.C.

Okay. And then on Strategic Communications, the headcount ticked down a fair amount there. I mean, can you talk about, is there turnover? I guess, maybe for the overall company and not specifically, what was driving that trend?

Dennis Shaughnessy

Well, I think they're fine-tuning it. I think the capital markets in Europe have been slow. I think it's -- the headcount in Asia is actually up. The headcount in America is probably moving up. They have some very strategic new hires that wouldn't be reflected in the numbers you've seen but are coming in now. I think Asia -- I mean, in Europe, they've been very cautious. I mean, I think people that are engaged in the capital markets work in Europe are very worried right now. And I think the results that we're seeing reflect the overall market concern. And they have cut back, especially over in Europe, to reflect what they see is the necessary complement for the balance of the year.

Timothy McHugh - William Blair & Company L.L.C.

Okay. And do have the -- what was the turnover for the overall company?

Roger Carlile

Yes, the trailing -- the annualized number for 2011 is running right around 18% all-in. That includes the special termination charges, so that number runs a bit higher than what we consider are involuntary.

Timothy McHugh - William Blair & Company L.L.C.

Sure, okay. And then, just I guess, Roger, while you're there, the tax rate, lower than normal this quarter. What are you assuming for the rest of the year?

Roger Carlile

36% for the quarters' the back half of the year is what we're assuming the tax rate will be.

Timothy McHugh - William Blair & Company L.L.C.

And is that -- is the tax rate now at a new kind of lower level, given the international expansion?

Roger Carlile

Right. I think for us, as we can generate more profits offshore, that allows us to drive our rate lower. Also, the mix of our rates in the various -- our earnings in the various states allow us to get maybe a slightly lower state rate in a perfect environment. So that is a low for us, and we look maintain that for the rest of the year and work to drive it a bit lower in the future.

Timothy McHugh - William Blair & Company L.L.C.

Okay, and one more, if I could. Jack, you talked about your consultants, and you guys believe you're close or at a bottom for the restructuring business. I think there's been point in times where you might have thought your were close before, I guess. And is there anything that gives you more confidence? And I guess maybe if you could just elaborate more on -- I think you said monthly trends or something like that?

Jack Dunn

One, I just think the fact of the -- first of all, I think that the size we are now, I think we're starting to see utilization rates that are reflective of the level of the activity that we have, that we're not having a lot of excess people. I think the professionals, in terms of staffing their jobs, that kind of thing, are feeling -- they kind of judge it by how much trouble they had getting people, how many people they have free, and they're sensing that they are reaching a point where they have people are pretty well-utilized. And I think the investments that we've made in the transactions, I think that ought to start to pay off dividends in the back half of the year. So those are the kind of things that give me more comfort than they have in the last 2 or 3 quarters.

I guess also, we have had a -- it's not dispositive, but we've had some stabilization, if not increase in our new matter of reports. So those are all good signs for this business.

Operator

Next, we'll go to Arnie Ursaner with CJS Securities.

Arnold Ursaner - CJS Securities, Inc.

There's been a pretty high-visibility international case in the news that would involve e-mail trails from both the U.K. and North America. You mentioned there are 4 players really capable of doing this type of the work. Are you the guys that is winning that business? And how might it impact Tech group in the quarter.

Roger Carlile

Arnie, number one is, as you can imagine, we can't talk about confidential engagements. We certainly will be a company that will be considered for cases like that.

Arnold Ursaner - CJS Securities, Inc.

Okay. I want to go back to your guidance which you reiterated versus what you had put out in May. But subsequent to that, you put out -- you took some cost-cutting reductions that were expected to have a $9 million benefit in the second half. So conceptually, if you're just reiterating guidance after hopefully getting a $9 million cost saving from actions you've taken, was that known when you gave your guidance in Q2 or expected, or is their some offsetting factor that's reducing your views by $9 million?

Dennis Shaughnessy

The $9 million was the anticipated in Q2, and that was baked into the number.

Arnold Ursaner - CJS Securities, Inc.

So when you actually gave your Q2 guidance, even though you haven't taken the actions, you view was that it was built into it.

Dennis Shaughnessy

Right. We were getting a pretty firm deal of where Corporate Finance was probably going to go to. And the decline that we saw predominantly, the bulk of the charge was related to Corporate Finance. And that was driven by the declining demand curve that we saw. It seems to be starting to flatten out, as Jack said.

Jack Dunn

We also will spend a little bit of that money. We will be reinvesting, as I mentioned, in the Transaction Support business. So we are keeping a little bit. It's not just straight adding on. Hopefully, as we blend it in and spread it, it won't be that dramatic. But we will spend a little bit of it.

Arnold Ursaner - CJS Securities, Inc.

And my final question relates to some cost issues in the back half of the year. You had indicated you had expected about a $0.15 hit from investments for international service centers and CRM. And you've also been talking about much more sizable branding expenditures in both Q2 and the back half of the year. Can you freshen up where we stand on both of those cost items for the balance of the year?

Dennis Shaughnessy

I think on the branding, we've been spending pretty consistently on the integration of all of our brands. To one, I would say that would -- the experience that you see in the second quarter would probably be replicated in the third, possibly a little higher in the fourth. But not a dramatic run rate decrease, Arnie. I think on -- I'll let Roger, since he's doing the service centers, talk about those.

Roger Carlile

Well, all of the service centers are now in place, particularly the one in Hong Kong. There will be -- you'll see a full run rate. Q2 was a partial run rate, you'll see a full run rate of amortization, depreciation and personnel costs for that. So I think you'll see a slight -- for those issues, you'll see a slight build in Qs 3 and 4 from what you saw it in Q2. Our SG&A was up from last year, but the bulk of that is related primarily to the LECG transaction, the facilities we took on there and other LECG expense. I think SG&A, as Dennis said, will build, still build into the back half a bit, but we think not dramatically.

Arnold Ursaner - CJS Securities, Inc.

One more mechanical question. You mentioned you had a onetime impact from some compensation expense in Strategic and Financial Communications. What would the normalized margin have looked like in Q2 x-ing out that onetime expense?

Dennis Shaughnessy

Yes. I think we may be about 2 basis points higher -- 100 basis points, I'm sorry, higher. Two percentage points.

Operator

And next, we go to Scott Schneeberger with Oppenheimer.

Scott Schneeberger - Oppenheimer & Co. Inc.

I guess kind of first the question, you alluded to in the press release about, within the Tech Consulting group, a sizable -- just getting the exact quote here. Several large client assignments, I guess I can guess at what maybe a few would be. But historically in the third quarter, we have seen a slowdown in Tech Consulting from time to time. I'm just curious, what kind of tail or legs do see to some of the activities on the first half there carrying into the back half?

Dennis Shaughnessy

I think the client assignments they're referencing here, I think that the present thinking is that they will extend into 2012. How deeply into '12, we're not sure yet. But certainly, they'll impact Q1 and Q2 of next year. You're right. I mean, we have a seasonal slowdown in the company in Q3, and I think that a lot of times, that's simply driven by courts and banks not wanting to do very much in August. And then while it doesn't impact tech specifically, I'll just reiterate that the larger we become in Europe, the more we will be affected by the fact that, for the most part, Europe doesn't do a awful lot of business in the month of August. And there's nothing we can do to change that. Even if our people are willing to work and not go on holiday, if they don't have the cooperation of the clients and the intermediaries, you're not going to get a lot done. Though we would anticipate going forward, Q3 will continue to be our slower quarter, and it's really driven by August. And you're right, tech could be impacted by it because a lot of things they do revolve around production for courts and things like that, which tend to slow down in the August.

Scott Schneeberger - Oppenheimer & Co. Inc.

Okay. And then to the extent you can get this granular, within FLC, can you address how much are you seeing that's regulatory-driven as opposed to corporate litigation-driven? Just a feeling for mix there, and which is stronger, weaker momentum you've seen, and if you can bucket it that way?

Jack Dunn

Well, I think included in regulatory would be things that are related to securities fraud and things like that. I think the big difference that we're seeing now is the general litigation stuff is starting to rebound a little bit. We've been -- one of the things that kept us strong during the time when some of our competitors were -- when the industry was down was the specialization that we have, that was with the regulatory work we were doing on those major matters that are in the headlines everyday, and it was our global risk practice. So I think the big driver there is, in the day-in, day-out, is the general commercial litigation. And that's what we're starting to see a little bit of a rebound. So I would say it's always numerically, probably the bulk of it, but it has been kind of flat. Now its starting to grow a little bit.

Roger Carlile

And they've done a good job. Remember, they were the ones that really benefited 2 years ago from just landing, the mega, mega forensic investigations. Madoff per example is probably running at half of the rate that it did last year, so they've more than made up for several of the large assignments that have burnt off. I think the other area that we're pleasantly surprised in is the demand for the forensic services and special investigations out in Asia has really start to pick up. And I think that's a reflection of inbound capital movements back into those economies and the demand for the services that we provide in front of those capital flows. So that has been clearly a change that we've seen in the last 4 months.

Scott Schneeberger - Oppenheimer & Co. Inc.

One more, if I can sneak in. Just an update, I know it's been a while, and so it's probably well-integrated. But SMG, with regard to the real estate practice within Corp Fin/Restructuring, just any thoughts there.

Dennis Shaughnessy

Well, I think it's still basically a year-over-year flat business. I think that we see bursts of activity, especially in a couple of the large metro markets. But where SMG really provides value-added expertise is on the front end of large real estate transactions, the structuring part. And unfortunately, it seems to be very busy one quarter, and then it slows down for 2 quarters, very busy 1 quarter. We have not seen what I would call a capitulation in the real estate market, so the cap rates haven't gotten so low where everything is flown in. We are consolidating, as part of the movements that we've made in our organizational structure. We're consolidating a very prominent real estate practice that we have on the restructuring side led by Ron Greenspan in California, or as with our SMG group in New York to try to get more scale and more power in the market by putting 2 extremely well-thought of groups together approaching real estate from a little different perspectives. But we think together, they'll have a better go-to-market opportunity than approaching it separately.

Jack Dunn

Going back to your question on the regulatory versus other. It's a real back-of-the-envelope number, but could make a case that about 40% of the segment's revenues are related to some kind of investigation that's regulatory-driven or regulatory-related, something like that. SCPA, that would be all securities, fraud, that would be that kind of thing.

Operator

And next, we'll go to David Gold with Sidoti.

David Gold - Sidoti & Company, LLC

First one is an easy question. And that is, can you give just a little bit of color on sort of the variance, or what was different between EPS at the time you gave the pre-announcement and when we reported. Sort of what came out differently?

Dennis Shaughnessy

Yes, we got a new CFO. We wanted to be very conservative.

David Gold - Sidoti & Company, LLC

Are we saying the old CFO wasn't good?

Dennis Shaughnessy

Well no, I think he's sitting right to my left. No, I think in honestly, David, the reason -- if we were to have our druthers, we would have liked to have waited and announced the special charge in conjunction with our real numbers. I think because we decided for the sake of the morale of our people, to get it all over with in one fell swoop and do it in the quarter. We were required to make an announcement. We didn't want to just make the announcement to you guys, "Here's the charge and trust us. In 4 weeks, you'll hear the real numbers." So we tried to give you a range that we were highly confident of from the point of view of the revenues and a best guesstimate at a time when we really hadn't closed the books off. The main variable, as you can imagine, is we ported over a lot of people in different parts of the world with different degrees of work in progress that we were trying to get our arms around and tools out and things in LECG. It came out a little better than we had expected. We had expected more of a negative impact on the earnings. So I mean, you could just turn around and do your math in your head. You picked a couple of cents on the tax rate, and that was driven by the fact that the earnings were stronger overseas than we had anticipated. You picked up a couple of cents on LECG versus the anticipation of a $0.02 or is $0.03 drag. So you go from $0.57, $0.58, which was our initial estimate, you pick $0.02 on taxes, and LECG flips to a $0.02 positive from a $0.03 negative, and you're at $0.64. So it wasn't a lot more than that. And while I was being somewhat facetious about Roger, we certainly weren't going to blame him for trying to be conservative, given the first time -- sort of integration, reporting of those numbers through our system.

David Gold - Sidoti & Company, LLC

Okay, got you. And then looking at things a little bit more on business specifically. Can you speak a little bit to the uptick both you and some competitors are seeing on the FLC side, particularly from litigation? And I'd be interested to hear your take on what's driving that. Are the pipelines now opening up, or are folks just more comfortable, all of a sudden spending?

Jack Dunn

Well I think, as we had mentioned, that we did see a C change in the beginning of the year in terms of corporate legal departments having budgets for litigation matters and that kind of thing. So I think we're starting to see some of the fruit of that. I think also as you've seen in our particular case, as you have seen more business being done, investment banks and PE firms starting to put money out around the world. Our investigation practice has been very, very strong. You've seen the growth that I mentioned that we had outside the United States. And then I guess, the trial thing is that we were talking earlier about, whether the M&A work that we were seeing in the Economic Consulting was a leading or a trailing indicator. What you're seeing as a trailing indicator is the fact that all the litigation from the excesses of the credit markets and all have now come into fruition. We are -- remember that 1/2 of our econ or so, maybe 1/3 to 1/2 of it, is what other people would have in their litigation. So there's a lot of litigation active now following all the things on the collaterals, mortgages and all that. All of the litigation following. So I think you're seeing everybody participating in that to some degree.

Roger Carlile

Our investigative side is up significantly, not only in Asia, as I've talk about, David, but also here in the States, where companies are actually investigating various things. So it hasn't matured in the potential civil litigation, but some of these are internal issues, some of these are FCPA issues, especially driven over in Europe. And some of the FLC work is special investigation, as I said, in front of flows of capital in Latin America and Asia.

David Gold - Sidoti & Company, LLC

But I guess what I'm getting at, at the heart of my question is really, given the last couple of years and how quiet things have been, do we think that some or much of this is sort of courts basically pushing things now through the calendar, which would suggest that you'd have a pretty good pipeline there?

Dennis Shaughnessy

Well, it's clients. I mean, I think it's more of Jack answer. I believe you have companies that have done a great job of cost control and have sat down and, I guess, sort of kept waiting for the tea leaves to be clear for them. And now they're just not hesitating on moving forward on pent-up litigation.

Roger Carlile

David, this is Roger. Being I was in that business, I can't help myself but want to talk about it. Pretty much, David, what Dennis said is correct. I think you have a few trends there. So one, you have the credit crisis litigation that is coming to fruition. Two, I think you're right. I think what Jack said about budgets. In the crisis, we've found in a lot of litigation was discretionary in timing, it could be deferred. Some was not intellectual property, some of those kinds of things are tough to defer. But a lot of the core, basic sort of business litigation could be deferred. And I think it was deferred until the general counsels -- as budgets were loosened up a bit, and that sort of started coming out this year. And of course, the question as you look forward, as Jack mentioned in the commentary about the economy is, will it stay or will the corporates pull back again? I mean, right now, the corporates seem to be reporting pretty good earnings and they have lots of cash, so we're hopeful that they're not going to pull back. But that would be the issue in their budgets.

David Gold - Sidoti & Company, LLC

Got it, okay. And then just one other. And I think there was a comment in there along the lines with regards to Corporate Finance/Restructuring, that now we're sort of better positioned assuming for this economy, so to speak. I guess, just curious if you can elaborate a little bit more than that as to essentially, if the economy sort of stays as it is on a holding pattern, where are we? Where do we expect the growth to come from?

Dennis Shaughnessy

Well, I think what we're seeing -- I think we expect just some sort of a reorientation of Corporate Financing. I think if the economy stays the way it is right now. I think you would get -- or right now, we're experiencing about a $100 million run rate, in round numbers globally, on Corporate Finance. We've seen that for a couple of quarters, and our people sort of feel that, that's a number that looks good for the next couple of quarters. The composition of that number, David, is changing. So one, Asia's doing very well. It's a different market. And in Europe right now, they've gotten a little busier. And your prediction of Europe probably might be better than our prediction of Europe of what's going to happen over there, but they've certainly gotten a little busier. U.S. restructuring continues to decline, but it's offset by our more pro cyclical parts. So healthcare is having a very good first 6 months. Our process improvement work in our communications, media and entertainment group, is having a very good first 6 months. And our transactional support group, as Jack said, we're really starting to beef that up because we see demand coming back into there. I think it's somewhat a rearrangement of where the revenue flows come, but what we're seeing now is I would call it an equilibration where the decline in U.S. restructuring, which has still been significant, is being offset in the U.S. by other opportunities, Asia doing well, Europe starting to pick up. I would say Europe is a wild card to a certain extent by the end of the year. But to our people, it appears that the run rate we are in right now makes sense. And that's the adjustment we made to align everything to that run rate.

Operator

And next, we'll go to Kevin McVeigh with Macquarie.

Kevin McVeigh - Macquarie Research

Great. I wonder if you could give us a sense of what size run rate the Corporate Fin business is scaled for now as you think about annualized revenue, given some of the actions you've taken.

Dennis Shaughnessy

Kevin, I think what I was just trying to say to David is we were looking at sort of a rearrangement of the revenues that seems to be equilibrating at about $100 million per quarter revenue run rate. We've experienced that in the last couple of quarters. It appears that for the next couple of quarters, that, that's a run rate that makes some sense. It will change. In other words, the restructuring business in the U.S., given the economy stays the way it is, and given you have election year to, where you have a government motivated not to see a lot of defaults or a lot of bankruptcies, we would anticipate restructuring to continue to decline. But it's being offset by more pro cyclical activities inside of Corporate Finance, like process improvement work in communications and media and our healthcare business. Asia's doing well. Europe is certainly picked up, but again, we don't know how much of that is a short term blip or whether we're looking at sustained trend given the endemic problems that we're all watching in Europe.

Jack Dunn

I would remind folks that I'm not sure the economy's is out of the woods yet. And I'm not sure that as we get to the back half of the year and as we get -- certainly, by the time after the election next year, we're not just wiping out our bets, that restructuring might have a pretty good period in the next couple of 18 months. So we definitely want to save assets there because we are the best and the largest restructuring firm in the U.S.

Kevin McVeigh - Macquarie Research

Super. And then as you think about kind of the mix there, how much of it are kind of the large engagement versus smaller to medium sites today?

Dennis Shaughnessy

In Corporate Finance?

Kevin McVeigh - Macquarie Research

Yes, and then just as we think about it...

Dennis Shaughnessy

I think the vast bulk of the large assignments have either burnt off or in final fee stage. There are couple of larger assignments that we picked up, but they are not at the magnitude of what we experienced in 2008, 2009 and into 2010. We have been successful in picking up more middle market work, but as you can just simply look at default rates, there had been very few defaults in larger end of the spectrum. And so the Lehman Brothers, the General Motors, the things that we've worked on are winding down or have wound down.

Kevin McVeigh - Macquarie Research

Super. And just if I could, kind of the margin structure of that business, should we assume kind of a 17% to 20% over the next couple of quarters? Is that a good way to think about it?

Dennis Shaughnessy

Well, I think the margin structure is clearly driven by the velocity of the decline. It's hard to equilibrate margins when you have the velocity of the decline in revenues that we've experienced in Corporate Finance. I mean, all of our businesses can't turn on a dime. They're too big. This one can't turn on a dime. But we would anticipate that margin solidifying and improving slightly. It's not going to go back into the 30s until you have a frothy restructuring market where we again would get pricing power which we don't have right now.

Operator

Next, we'll go to Jeffrey Rossetti with Janie Montgomery Scott.

Jeffrey Rossetti - Janney Montgomery Scott LLC

I was wondering if you guys could give us maybe a further breakdown of what's happening in Europe.

Dennis Shaughnessy

From what point of view?

Jeffrey Rossetti - Janney Montgomery Scott LLC

Just geographically, where you're placed and services that your offering...

Dennis Shaughnessy

I'll start off. London is rapidly our largest operation. I think it's #2 in total headcount. It obviously has unique advantages, sitting on the zero branch mean meridian and able to do business on an active business day in both Asia, Europe and the Americas. We have added substantially to our operation in France. We have an extremely successful group in Strategic Communications over there. We've added econ and international arbitration capabilities there. And we anticipate that the combined groups will grow and do very well. We had a start-up operation over the past couple of years that was growing and doing nicely in forensics. In Spain, we added to that restructuring in Spain, and then we made a significant addition with Jorge Padilla's group that came over from the LECG in econ, which, it has a substantial presence in Madrid. So clearly, we are investing more in Madrid. Our Moscow office is busy. It has a lot of pent-up capital markets transaction work, but right now, the capital markets are being extremely selective in what they're letting out. If those markets improve, there's a high volume of business for us there. And I think we continue to invest in Germany. We are, on a relative basis, very small in Germany, given the size of the consulting spend in Germany. And you can anticipate that would be an area that we would be investing aggressively in over the next 3 years.

Jeffrey Rossetti - Janney Montgomery Scott LLC

Okay. So it sounds like, I mean, the risk is probably the Capital Market stuff in Spain. Is that -- just trying to get a feel for...

Dennis Shaughnessy

Well, it's not capital mandates that -- the capital markets are slow. If you look at it from a macro point of view, the drag on the European, if there is any, obviously, their growth was fantastic, as Jack said earlier. The capital markets work specifically, based on our communications groups in Europe, is slow. And that's not a function of our groups, it's a function of the markets themselves. Our backlog is probably larger than we've ever had for capital markets transactions. It's just simply that the markets, for all the reasons we're all staring out on our screen, are very worried about other things. Number one, and approaching new capital transactions with a high degree of trepidation. So I think that would be where -- if that worsens, we could see a little bit of slow down. If that picks up, there's significant operating leverage for us if those markets pick up and return to any degree of normalcy that we've seen back at healthier periods.

Jack Dunn

I think a little bit, our results in EMEA are masking what is otherwise a very bad situation over there in terms of the economy. We're very lucky that we have specialized practices. We're very fortunate that our Technology business there is one of the few that can handle some of the huge investigations that have now migrated being U.S.-centric to being global, the same for our forensic litigation. I think that the fact that we have the top, bar none international arbitration practice in the world bodes very, very well for London because as you can imagine, because of the very reasons Dennis said, that hub for that kind of thing, it's stable legal system, it gets it out in the hotspots of the world. You can go there out of Asia, out of the U.S., out of South America. But I think the economy there is very poor. I think the business -- it's like the U.S. without M&A. There has not been the vibrant practice of M&A that there has been over here. I think the banks there are much more cautious in terms of their ability to do transactions than we are. So I think we're very fortunate to have the platform that we've built at FTI because we're getting much more than our fair share of business in EMEA right now. So I think that hopefully, as their situation improves and they correct their debt situation, ha-ha, that, that economy will improve a little bit and we should do even better there, especially as Dennis said and as you mentioned, in the capital markets area.

Jeffrey Rossetti - Janney Montgomery Scott LLC

Okay. And then one just last one. If maybe you could just talk a little bit about pricing and what you're seeing in the different groups, and particularly e-Discovery.

Dennis Shaughnessy

I think on e-Discovery, pricing has been balanced. I think as we constantly say, the cost of storage declines each year and your volume of materials to store and manage increases, and that has not changed. So we certainly have seen price stabilization on the Technology side. I think as David said, maybe it's because of the acquisitions, maybe because some of the companies starting to dress themselves up to be acquired. We've seen more price stability. And then in the higher end of the market where some of our large assignments are, it never has seen the degree of price sensitivity that you see in the middle of the market. So I would say we've been witnessing price stability over the last trailing couple of quarters, offset by the normal decline in storage cost, but more than offset by a significant increase volume that we're storing.

Jack Dunn

And new product development.

Dennis Shaughnessy

Yes, our technology. I think our Acuity product has just been extremely well-received by the marketplace. We think it has a chance to be a disruptive offering. And we are extremely pleased with the uptake of the product, its performance, and the cost benefit that it's generating for the clients who are using it. And as of right now, that's not a price-sensitive product.

Operator

And we'll take our last question from Dan Leben with Robert W. Baird.

Daniel Leben - Robert W. Baird & Co. Incorporated

First, could you talk about the impact of FX on the top line in the quarter, both at the corporate level and if there's any segments that are materially different from that.

Roger Carlile

Yes. FX had about a $6.5 million revenue impact, positive impact to revenue. It had no impact to EPS. Predominantly in Strategic Communications.

Daniel Leben - Robert W. Baird & Co. Incorporated

Okay, great. And then looking just at the tech segment and looking at the incremental margin progression there. How should we think about that going forward? Shouldn't this business have a higher incremental margin than somewhere in the kind of mid-30s?

Dennis Shaughnessy

No. Remember, it's a hybrid business. It is a mixture of consulting and technology, but if we turn around and say, "Your classic tech margins are much higher because at the end of the day, it's either an on-demand service or media," you then have to blend that in with the consulting margin in the 20s. And so you could do the math, you're taking a tech margin, blending it in with consulting margin in the 20s, and you're coming up with mid-30s. So I think if you look a lot of the SaaS -- I would say look at a lot of the SaaS companies, Software-as-a-Service, where they have more of a hybrid model, and I think you seen most of them operate in the mid-30s to higher 30s, which is where we're hanging around.

Jack Dunn

I think we've been pretty clear that our expectation of that business is to be in the mid-30s.

Dennis Shaughnessy

Yes. I would say that's about a proxy. Look at the SaaS companies, and I think as you compare those margins to it, we're sort of in line with those companies.

Operator

And that's all the time we have for questions today. I'd like to turn it back over to Mr. Jack Dunn for any additional or closing remarks.

Jack Dunn

All I'd like to say is again, thank you all for joining us. I know people are scheduled for chats with Roger, so we look forward to speaking to all of you. We would like feedback if you like this new format where we kind of cut down on the prepared remarks and leave much more time for Q&A. Thank you again.

Operator

And that does conclude today's conference. We thank everyone for their participation.

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