FTI Consulting's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Nov. 2.11 | About: FTI Consulting, (FCN)

FTI Consulting (NYSE:FCN)

Q3 2011 Earnings Call

November 02, 2011 9:00 am ET

Executives

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

Mollie Hawkes -

Jack B. Dunn - Chief Executive Officer, President and Director

Dennis J. Shaughnessy - Executive Chairman

Roger D. Carlile - Chief Financial Officer and Executive Vice President

Analysts

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

Paul Ginocchio - Deutsche Bank AG, Research Division

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

David Gold - Sidoti & Company, LLC

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

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

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

Arnold Ursaner - CJS Securities, Inc.

Operator

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

Mollie Hawkes

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

Before we begin, I would like to remind everyone that this conference call may include forward-looking statements, within the meaning of Section 21 of the Securities and Exchange Act of 1934, that involves uncertainties and risks.

Forward-looking statements including statements concerning our plans, objectives, goals, strategies, future events, future revenues, future results and performance expectations, plans or intentions relating to acquisitions or other matters, business trends and other information that is not historical, including statements regarding estimates of our future financial results.

For a discussion of risks and other factors that may cause actual results or events to differ from those contemplated by the forward-looking results, investors should review the Safe Harbor statement in the earnings press release issued this morning, a copy of which is available on our website at www.fticonsulting.com, as well as other disclosures under the heading Risk Factors and forward-looking information in our most recent form 10-K and 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 B. 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 Chief Financial Officer; and David Bannister, the Chairman of our North American region. In response to your positive feedback in our last call, we like to follow the format of keeping the prepared remarks brief giving you a couple of takeaways that we feel might be potentially important to you and then leaving as much time as possible for questions and drilling down on the issues that are really important to you.

In the context of reviewing the results for the quarter, I would ask you, as always, to keep in mind that the goal of FTI is to be the number one 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, really our value proposition is to attract, hire, acquire, develop 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 as one firm through the last mile of execution in a timely, effective, thorough, seamless and cost-efficient manner.

I think that this was a defining quarter in validating that strategy and achieving that goal and we'd like to give you a couple of things to think about in those terms. The first is that it was truly an excellent quarter. The company grew 20% as a whole with a robust 11% of that being organic. Second, our pro cyclical businesses again led the way with an aggregate 28% growth, all increased 3 delivered exceptional results and 2 of them delivered record performances. Third, our activities outside North America continued to again be very, very strong. Finally in the quarter, I believe many of the steps that we have taken over the last months, quarters and years and some of you have been there with us came together to demonstrate the power of the platform we have built and the intellectual capital that we have brought together.

With regard to the quarter, revenues rose 20% to a record $414 million, the highest quarterly revenue in the history of the company and our third consecutive quarterly record. Earnings per share for the quarter were $0.70, up 63% over earnings per share in the third quarter last year tying the all-time previous record for any quarter. Adjusted EBITDA was 18% of revenues, 150 point basis -- excuse me, 150 basis point improvement over the last sequential quarter, demonstrating the assimilation of our new LECG professionals and the con-commitment ramp-up expenses associated with them into profitable performance.

With regard to our pro cyclical businesses, as a whole, they grew 28% and new organic growth for these businesses was a robust 18%. The delta, again, represented mostly growth from the LECG transactions, which at over $25 million are certainly exceeding our expectations.

Highlights in the pro cyclical businesses were 61% revenue growth in Economic Consulting to new record levels, of which 30% was organic, 33% growth in technology, all of which was organic, maintaining its status in the exclusive 30-30 club of businesses that produce both 30% growth and 30% adjusted EBITDA margins and 18% growth in Forensic and Litigation Consulting also to new record levels of which 9% was organic.

Despite, again, herculean headwinds, strategic communications showed increased revenues at about 3% due to foreign exchange, but the real story here is that it remained number one in the league tables and it did so globally as an international firm as a whole in Europe where the competition is intense and in Asia where it has the luxury of being -- not luxury, but the hard-earned position as a dominant player.

With regard to our activities globally, our revenue outside the U.S. this quarter was 35% over the same quarter last year and represented 23% of our total activities. Revenue in Europe and Middle East and Africa grew 27% compared to the prior year period. Total revenues in Asia-Pacific grew 46% compared to last year, 31% of which was organic revenue growth with Forensic and Litigation Consulting and Strategic Communications, again, leading the way.

Latin America's revenues grew 82% year-over-year, 57% of which was organic. Although as we said last time, Latin America is still small relative to the rest of the company, these results signify the dynamic market opportunities for FTI in the region as their quarterly results continued to follow a rapid growth trajectory. We are particularly focusing on Brazil where we now have over 100 people and believe the confluence of natural resources, Olympic Games, infrastructure improvement and outside investment creates a dynamic and fertile market for all of our services.

With regard to our Corporate Finance and Restructuring business, as we said last quarter, we and more importantly, so did the professionals in the business believe it is at or near its bottom. Our actions in the prior sequential quarter to both position the business for new levels of core restructuring that we are currently experienced and in anticipation of different areas we expect to grow have contributed to an improvement in adjusted segment EBITDA margin of over 3 points compared to last year. As always, such improvements always start with leadership, and we believe our new leaders there, Bob Duffy and Kevin Lavin, as well as experienced presence of Dom DiNapoli in the marketplace, we're off to a great start. It's a tribute to the professionals in this business that we continue to be selected for the matters that are of highest profile and most important, so literally our economies such as MF global.

During the quarter, we received and retired approximately 667,000 additional shares of our common stock in completion of the accelerated buyback transactions entered into March of this year. This brings the total number of shares received under the transaction to approximately 5,733,000 and the average price was $36.52.

We currently have $120 million of unrestricted cash in the bank. We have no borrowings on our $250 million revolving credit line. Our operating cash flow in the quarter was $59.7 million and we collected $370 million during the quarter, reflecting the new paradigm for our receivables that we discussed in some depth last quarter.

With that I'd like to turn it over to Roger Carlile to talk about the 8-K that we filed this morning. Roger?

Roger D. Carlile

Thank you, Jack. Now the 8-K that we filed this morning related to an immaterial vision of the company's accounting to reflect the acceleration of noncash expense related to certain forgivable loans and share-based compensation awards granted to employee participants of our ICP program. It's important to note that this provision has no effect on the value of the awards or the vesting terms and conditions of the awards nor does is impact the company's revenue, cash or liquidity for any prior our future period. Furthermore, it's important to note that it does not impact our previously announced 2011 earnings guidance, which we reaffirmed on August 4, 2011. Simply, to make it simple, what this is, is for 2/3 of the awards, we're not going to be amortizing that, the noncash expense over a 5-year period rather a 6-year period. Back to you, Jack.

Jack B. Dunn

Okay, thank you very much. If I could take one minute and sum up what this quarter really means to FTI Consulting. I think it's really that we came together in a number of things. A number of the plans, a number of expenses, a number of the investments that we made over the last, as I said, months, quarters and years came together. In terms, for example, of our Economic Consulting group, some of you tougher [ph] with me as we explained we were making significant bets in Europe and that those bets would pay off. And I think today, as you look over the international playing field or battlefield as it were of anti-trust competition with 60% growth in that segment, you're seeing that payoff.

In our Corporate Finance/Restructuring group, we took some painful steps there, but at the same time we invested in areas like healthcare and communications, media and entertainment and those bets paid off big in this quarter as those areas of specialization grew as did our investments in Europe and in Asia.

And I guess, possibly technology, I'm very proud that you all bore with us as we made extensive investments in our R&D. And in this quarter, you saw the continuing trend where our technological solutions, our Ringtail 8, now part of the acuity solutions really have -- you didn't hear us talk about the low-cost competitors and things like that because companies are now consolidating their efforts on their e-Discovery. They're looking for tried-and-true solutions that can attack the highest cost element of that business, which is the document review part. We have technology solutions that handle that on a cost-effective basis. We have the scale, a global footprint and experience that are second to none though their results are no fluke, they're the real thing.

Finally, all of that is really a metaphor for what we started in January this year when we dedicated our firm to being one firm and harnessing really the power of one, taking our 3,700 great people all over the world and having them operate under one brand. I'm happy to say that as of November 1, we turned on our new website, which was, again, the symbol of that, but a lot of hard work went into that. And as of this point, we are operating around the globe under the banner of FTI Consulting. So with that, let's get to the most important part, which will be your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Tim McHugh with William Blair & Company.

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

First wanted to ask, just trying to dig into the underlying sustainability your trends, which look great, but can you talk at all about success fees this quarter? I guess specifically in the Restructuring business and then just the, I guess, impact of any abnormally large cases? I know you don't specifically talk about the cases but, was that a driver at all, the performance or anything we should be aware of with regard to that?

Dennis J. Shaughnessy

It's Dennis, I'll try to take that up. We didn't have any abnormal impact from success fees and specifically, because I realize it's been filed and people are looking at it, we did not book the success fee in General Motors if that's what you're looking at. So we would anticipate that being booked upon court approval, which I think they're estimating out to be at the end of this year. We have been very fortunate as you can see from the press, in some notable wins Kodak and MF Global, obviously, being 2 of them. We just started work a couple of weeks ago on Kodak and on MF Global, clearly it's a work in progress as we speak. So those, while they're very notable and clearly very important wins for us, would not have had much an impact on CF. So it was really more of what Jack said. It was some of the areas, we've invested in Asia is doing very well and continues to do well so trend is good. We've clearly solidified, we think, a bottom for core restructuring and I think that they're starting to get on a broader basis, business across the board, which as you well know has offset some of sort of the burn off of the bigger cases, Lehman Brothers and General Motors.

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

And then with regard to the M&A environment, obviously, the Econ and Tech segments are doing very well, but yet some of the macro data would tell you the -- especially large-company M&As as very choppy right now. Can you talk about what you're seeing and how to reconcile, I guess, the choppy macro data for M&A with the results from you guys?

Dennis J. Shaughnessy

We can't disagree with what you're seeing. I think, number one, there's a lot of prospective M&A and so I think you need to understand that we get retained by a lot of firms who are looking to make a deal and they're trying to figure out in all honesty whether the deal is sellable vis-a-vis, either Brussels or Washington for the regulatory people. Number 2, would be that there are big deals there. There are big deals that have continued to go on. We are in those deals. It's not only M&A that drives that but there are 2 other drivers. One, is just the overall competition area. There are a lot of companies in the tech world right now that have a lot of competition issues with each other in different parts of the world. So it's not just simply in the U.S., a lot of it is actually in Asia and in Europe and we are right in the middle of many of those big cases. Secondly, our economists are their premier people in building these complex damage models globally for securities litigation, mortgage-backed securities litigation and general financial litigation. I think as you know and many of our investors know, a lot of that litigation, while filed 2 and 3 years ago was somewhat dormant waiting for the governments to sort of do their thing first and also to see in all honesty whether the plaintiffs were going to survive. That's now heated up and these people are very busy in these large cases. Again, many of them are global, many of them are in Europe, many of them are actually in international arbitration and many of them are in classic U.S. civil securities litigation. So it will be the 3 drivers would certainly be M&A and maybe we get a little different perspective than what the data in the marketplace would yield you. Two, would be just general competition issues, they aren't related M&A. And then finally, we are extremely busy in the high stakes financial litigation area.

Jack B. Dunn

When you talk to the people in Economic Consulting, for example, what they'll tell you is when you have an interesting situation like this with corporate coffers really full, nobody investing in bricks and mortar that they do 2 things, they acquire companies or they sue each other. And that we really are in the midst of that. Our competition policy people are not busy just on M&A work, but they're in a host of antitrust lawsuits at the moment. And when you add to that mix kind of all of that corporate coffers taking place in an economic environment, which is at best, uncertain. And you have activist regulators in the U.S. certainly and you have protectionist regulators both regionally and nationally. I think we're seeing stuff that we've never seen before and it's funny, we've been a little contracyclical, if I will, to the normal M&A trend back earlier a couple, you probably in the last half or last year when there were small IPOs and there were some small M&A activity going on, people said, why aren't you busier? Right now, these are juggernauts that are going to war with each other and there's long time both in battling them and in planning them. So we really see a quite dynamic pipeline of transactions there. And fortunately, some of the larger ones that we were successful in getting are just entering the stage now where they're coming to full.

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

My last question would be just, I know you normally give guidance in the second and fourth quarter or after the second and fourth quarters and Roger, you had said you had reaffirmed guidance on August 4, given these results, it seems like you would almost certainly be at the high-end or may be above the old guidance range. I mean, can you -- are you willing to talk at all relative to that old guidance range? Or should we still be using that old guidance range or is it just not relevant anymore?

Roger D. Carlile

No, I think you should continue to use that guidance range. I mean, we clearly had a good quarter. I think as Jack mentioned, we're looking forward to a strong fourth quarter and a strong 2012. We'll be preparing our 2012 guidance over the rest of this quarter and we'll deliver that in February as we normally do.

Operator

And our next question comes from Dan Leben with Robert W. Baird.

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

Could you first talk about some of the trends you're seeing underlying the Technology business, sustainability of those? I know in the past you talked about some big cases popping up some work and the results being a little volatile. Could you talk a little bit about the sustainability of the success you're seeing there?

David G. Bannister

It's David Bannister, I'd be pleased to address that. First of all, you may have read earlier in the year that were selected in the magic quadrant for Gartner, which was an important achievement for our technology folks. It was a demonstration of not only the leadership position we have there, but the belief under the part of Gartner that we have a -- demonstrated to commitment to the intellectual property underlying that and the technology basis of that. One of the big things that really led that is the leading position we've really taken since we've been in that business of getting out in front of the ways to handle issues. So, for example, we are now using artificial intelligence in a very profound way to review documents such that literally human eyes never have to hit the documents prior to production. It needs a lot of acceptance in the courts and in the discovery process to be a significant change, but we all believe that's where the industry is going. We're a leader in that, we're right in front of that and it's really important technology. The second thing would be the acuity offering, which is a combined offering not only of the technology but the associated services around that, that really provides, for the first time, a seamless product from the beginning to the end of the process and allow our professionals to work closely with their clients in effectively and efficiently and in a cost-effective manner, most importantly, solving not only the search process but the discovery and production process, which is really where the big costs are. We think that about 5x the amount of a search cost are in a review function. It's a big problem for corporations. It's very expensive and we really think that we need to help work with our clients to attack that cost and we think we're doing that effectively. We are the beneficiary of several large engagements in that segment. That's the nature of the business that when something important happens around the world, where major companies need to do work on something that they need to attack them in big and frankly a pretty expensive way. So we do continue to benefit from large engagements there. That's the nature of our business. We would expect to have those sort of things in the future as well, but that is a factor there.

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

And then secondly, with the growing international exposures, could you just walk us through what the impact of FX was on each segment?

Roger D. Carlile

Yes. I think primarily FX impacted our Strategic Communications segment. I think as we said in the press release, while the revenue was up about 3%, if you took out foreign exchange, they were essentially flat. The rest of the changes are -- I think all of the major currencies that we trade in from year-over-year last year to this year were negative for us against the dollar. But I'll have to find you the total adjustment in terms of dollars.

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

Okay, great. And then could you just talk a little bit about what you're seeing? You mentioned some of these larger companies getting more active on the litigation front, how does the pipeline feel today versus, say, 6 months ago?

Dennis J. Shaughnessy

Well, I think -- it's Dennis. I think the pipeline was there 6 months ago. It's just a matter of the maturity. I think you had a lot of inertia in the pipeline. So you had cases filed, we were retained. And I think what you're seeing now is just a lot more movement in the pipeline. And therefore, more activity for us. And I think that you're running -- secure, it depends. I'm not going to give you a technical answer, but at the end of the day, you have statute limitations issues in these cases. So you can't let them stay stale forever. Securities, related issues in jurisdictions, especially the U.S. have one of the shortest statute of limitations. So what happens is you eventually have to see these things either go away, settle or mature into very active cases and we're seeing a reluctance to settle, because in all honesty, a lot of these are jugular. And so we're just starting to see a lot of activity. So I would say it was always in the pipeline. It was just more dormant and now they're really heated up in the last 2 quarters -- 2 to 3 quarters.

Roger D. Carlile

And to come back on that, for the quarter, FX added about $3.7 million of revenue. And the bulk of that was in strategic communications.

Operator

And our next question comes from Paul Ginocchio with Deutsche Bank.

Paul Ginocchio - Deutsche Bank AG, Research Division

Back to the economic division, obviously, you had a great year. Where can peak margins go? It's still a couple of hundred basis points under where it peaked in the previous cycle. Can you get back to those levels with the LECG acquisition?

Dennis J. Shaughnessy

Yes. I think -- Paul, it's Dennis. I think that's obviously the goal. The economics group, one has great organic growth but it's also the main beneficiary in the bulk of the LECG professionals that came over. And I think as we explained the way we did that deal in the beginning, there were tails on comp programs and things like that, that would not be necessarily amicable to our margin expectations, but that was part of the process. And as those burn off, and the people are moving onto our comp systems and as Jack said, in all honesty, they're integrated. I think a lot of -- we're talking about them because obviously, you guys want to know about them, but they're part of FTI. A lot of the business being generated is being generated by some of their cohorts from -- who are old FTI. And so I think we're seeing the margin improve faster than we thought. So and that's mainly -- it's not so much that the burn off is faster than we thought, it's the new business that they're working on is coming in faster. I think the LECG professionals, Roger, represented about $26.7 million in revenue for the quarter, which is clearly higher than our expectations. But again, a lot of that is new business being generated. So that's sort of a long-winded way of saying, yes, we expect some margin improvement from there. But remember, the comp model in general and the Economics group yields below 20s EBITDA margin. That is the nature of the industry in the beast. And I think we're looking for them to return back to that level but that is not the same model we see in some of our other operations, which would give you a mid-20s to higher 20s margin.

Paul Ginocchio - Deutsche Bank AG, Research Division

And just to go back to the guidance, and not to harp on it, but even at the high end of the range, it's only implying $364 million of revs for the fourth quarter. That's significantly down Q-on-Q. It just doesn't seem like that's a reasonable expectation. Any commentary on that?

Roger D. Carlile

I think as we've shown in the past and we show now, we will be through the top end of the guidance range on revenue. I think we just don't see a reason to focus on the fourth quarter when it's basically halfway over. We're targeting to 2012 and we'll give our guidance on that early next year.

Operator

And we'll go next to Scott Schneeberger with Oppenheimer.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Just following up on that last question. Well, I guess, the answer clarified it for me with regard to above or within the revenue guidance range. And then success fees were asked earlier. But I guess where my question will lie is, you talked before about corporate fin and restructuring run rate of above $100 million now, and $110 million was strong in the quarter. Should we be thinking up at that level or is $100 million more reasonable, and just some more color around that?

Dennis J. Shaughnessy

Well, I think they had the benefit of a large job in the quarter, which we can't talk about. But I would say it's clearly $100 million. We feel pretty comfortable with especially with some of the recent wins. And Scott, it's going to be a lot dependent on how some of these recent wins including some we can't even talk about pan out. And in some cases, some of these things can be fixed in 90 to 120 days. So that, maybe, might be a lot of intense work but not a good long-term trend. In other cases, it's going to take a lot longer. So I think for modeling, you're safe at $100 million. We're not saying we think we can't do better than $100 million. We're saying we certainly feel we've found a floor.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Switching up over to Technology now. Acuity seems like it's doing very well. Could you address kind of what percent of the segment that's become? Or just what, I guess, to the extent you can get into it, what you envision that becoming in the coming year or 2 as far as size and prospects?

Jack B. Dunn

Well, we don't breakout product or offering sales for a wide variety of reasons. So we wouldn't do that. Look, we're very pleased with Acuity. We can tell you it is running ahead of the expectations we had for what is really its first full year of use. If you remember, we introduced it a little after Legal Tech last year. I think the most pleasant things is that it's being used in some of these largest engagements and so you have the eyeballs of almost a vast majority of the large legal community practitioners on both sides of these cases and everything. So it's getting a great viewing and I think the most exacting thing is we've been able to take this one client, as David said, a much more rapidly away from sort of the high touch into the high-tech aspects of Acuity. And so I think we're very pleased with it, it's running ahead of plan, it is benefiting from the right set of eyeballs on it, but I wouldn't want to speculate on what percentage it's going to be.

Operator

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

David Gold - Sidoti & Company, LLC

Just a couple of questions. One, I wanted to focus a little bit more around strength during the quarter in restructuring. I know the last question was $100 million of floor. But I was curious if, two things, one, if you can give a little bit more -- shed some more color on the areas that you spoke about in the release as to where you were seeing strength. And then 2, if you can give a sense for -- there's been a lot of chatter out there with Lehman coming to an end. And I guess, I remember from a bunch of years ago, as some of the bigger cases subside usually that creates a lot of work for you. If you can give a sense for, let's say, over the next period or 2 if we might even see a step up there just because there's so much work to be done to get to the finish line?

Dennis J. Shaughnessy

Well I think number one in core restructuring, as we said, we're the beneficiaries, some significant wins, some which you're reading about, hearing about some which we can't talk about. And so that's just sort of market activity and we've done well as far as bringing those in. We are busy in our communications, entertainment, profit and process improvement areas and were extremely busy in Asia and getting busier in Europe. So where Europe, David, would have had say, a slower first quarter, maybe even in halfway in the second quarter. It really started heating up towards the latter part of the second quarter and it had an excellent third quarter. And Asia has just continued to outperform plan over the year. So I'd say the drivers are clearly -- we've had some pleasant wins in core restructuring and the 2 geographies look extremely good. The Healthcare business is doing very well and I think everybody in general has spoken that they see a lot of activity in Healthcare, we're seeing that as well. It's clearly an area we will be investing heavily in, in the future in broadening, because we see the macro drivers that everybody else does. Lehman is not that big of a contributor in these numbers right now. So you're right, in has wound down. We don't anticipate at least the latest that I've heard a lot of sort of end of engagement activity. There will be a success fee filed for -- if it hasn't been filed for already. And we would anticipate as most professionals do, getting that fee. There is the possibility of some follow-on work in Lehman going forward, but it would be in a much lower rate than we experienced.

David G. Bannister

David -- it's a David Bannister, Dave Gold. The other thing that we have noticed and we don't want to bang the clacks on this yet. But for the first time in about 9 quarters, we saw an increase in what we call the distressed debt ratio in the quarter. So while the default rates and so would have been hovering about 2% for high-yield bond issues and so forth. So, really almost all-time low. We did see a tick up in that ratio in the quarter, which may be a bit of a forecast of a return to normalcy there with normal default ratios were at 4%. And obviously, if Europe and so forth continues to cause problems with the banks and liquidity, that could go back up again as well. So it's the first time we've seen that tick up for, I think, 8 quarters.

Jack B. Dunn

We mentioned the new leadership and it's not just Bob and Kevin, it's the whole team there in Corporate Finance. And one of the things that they have put a renewed effort into are more -- a better game plan is, I think, is on getting company side assignments and that's something we're just beginning to see the fruit of. And those typically, as you know from the experience watching the Wall Street Journal articles and on Lehman and New York Times and everything else, that's a lot of solid work. So as you see a Lehman paid off and that was a better assignment, you might see us pick up some creditor work that would be -- excuse me, might have seen us pick up where Lehman was creditor, you might see us pick debtor work where we can make up the difference there -- more than make up the difference. It's the heavy lifting.

Roger D. Carlile

Dave, just to amplify one thing. Dave Bannister made a very good point. it's something you ought to look at. If you look at -- there seems to be a 24-month or less correlation between spikes in what you would call distressed debt, ergo, trading over a 10% yield to maturity and obviously, defaulting debt. And the spike that we're seeing is pretty pronounced and if you go back and look at those mountain graphs, which a lot of the services, the correlation is almost 1:1 with about a 24 minus X lag. So if that's the trend, then we would expect to see that group just get busier globally, because we just expect to see more defaults. So it is a very good, there is an indicator of potential business for core restructuring, that's probably the best proxy.

David Gold - Sidoti & Company, LLC

And then just one other from a higher level. On the litigation side, where you have -- really strong work, impressed to see the pickup there and it's been pretty consistent. But I guess, I'm looking for signs of sustainability. I'd be curious to your sense of how much of the pickup or -- drives some new cases versus cases that basically are now being pushed for whatever reason, whether judges want to clear calendars or folks are feeling more comfortable and ready to actually spend again?

Dennis J. Shaughnessy

Well, I think it's predominantly new cases from the point of view of our billing. It doesn't mean we're involved in the conversations with them in the past or hadn't been retained. I think -- I don't think it's the judges pushing the calendars as much as the plaintiffs and the defendants having to engage more actively. I think one good proxy is I think that group has probably turned over 8 to 9 out of its top 10 cases from last year. So they replaced most of those big cases and even one as big Madoff is probably running significantly below our billing experience last year and even much below where it was a year before. So they've done an excellent job, while the numbers, the raw numbers themselves are extremely good. They've done an excellent job when you factor in that they've turned over probably 9 out of their 10 top cases of last year with Madoff still continuing, but running significantly less than it did the prior year.

Operator

And we'll go next to Tobey Sommer with SunTrust.

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

I was wondering if you could describe the expected cost benefits of the one brand strategy? And just curious, I know there's probably a lot of internal things you were doing in that process whether you might see the cessation of those activities be a stimulant to growth.

Dennis J. Shaughnessy

It's a good question. I'll take the first shot. I mean, we didn't do it for cost savings, number one. I think that I'm sure there's efficiencies when your marketing one brand rather than others, but I think we did it, Toby, for revenue generation purposes. So if the model is spend the same amount of money, or maybe a little bit more, just do it a lot more smartly than the quid pro quo has to be, we need to see it on the bottom line through revenue generation. I think that's clearly on a global basis, it was a no-brainer. It's the only way to go and I think even as we got down into the micro levels where we have strong local branding, I think the people realize that while there may be some bumps in the road, long term, it was the right thing to do. So I don't see it as a cost savings. I see it as a revenue generator. Jack?

Jack B. Dunn

I think we prefer to see some redirection. So for example, as you probably pointed out in the first year, you have things like a brand-new website that you have to develop and you have things like changing everything as simple from stationary and changing the signage to the things that you do to get people behind the effort, and those went very, very well. So I'd like to be some of those dollars redirected to outside. But we have a tremendous opportunity here now, especially as we have the kind of growth you've seen outside the U.S. where we're not known to be able to have that brand stand for something that'll really help turn our people into able to be better at marketing and sales and that kind of thing. So we're looking forward to seeing those dollars as a percentage of revenue not to really try to save on that for a while anyway. We've got some pretty big competitors now and we need to stand toe to toe with them.

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

On the Technology business, I was wondering if you give us your sense as to how fast the market is growing and what that contribution is to your organic revenue growth versus what you might see as market share gains given the consolidation you described?

Jack B. Dunn

Market is still growing rapidly. David, you might have a better macro sense to that.

David G. Bannister

According to Gartner, the way they define the market, it's growing around 9% to 11% a year, it's always tough to get a clean definition on it. The conflicting issues you have there is you do have cost of storage and so forth coming down a bit, where you have overall demand growing because of the proliferation of form factors and just the raw numbers of documents that are created in our society. But they would peg it around 9% to 11%. We clearly think we're at growing market share. During the last 2 quarters, you saw some consolidation going on in the industry with a number of smaller companies getting picked up by some larger companies, which we actually think is very healthy for the market and for us. It helps rationalize competition, it helps standardize how people think about the products, we think it gives a better pricing umbrella. I mean, someone like Symantec is not going to wanting to give away product, where a venture-backed company might give away to try and get market share. So we actually view all that as being very positive. But there is a winnowing down to the bigger players now, and that should be good for us. We believe we're the biggest player, we believe we're the best player, we believe we're the most profitable player. And we think all those things, and we believe we have the best expenditure in R&D and so forth.

Jack B. Dunn

Reaching a stage where some of the process are becoming more standardize and the buyers are becoming very smart. They want a player that can handle their stuff all over the place, not just the flavor du jour, and I think that if you talk to our people in the business, that really is a positive sign for us because we've always, whether it's been through the intellectual capital side with the Sedona Conference or whether it's working with the judges, we've always been there as the people that help write the RFPs for how you're going to this in a way that's trusted by the legal system. So I think, as I say, I don't want to declare a victory or spike the ball on the 5-yard line, but there's a real different kind of spirit there about some of the smaller competitors with either consolidation or with going out of businesses, that we're down to real business now for big companies where we'll make a legitimate business transaction with them as a business partner.

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

Just one follow up there, is that 9% to 11% number that you gave, David, is that domestic or global?

David G. Bannister

Global. But the bulk of that market is domestic at this point, in time. It is growing in Europe. We've had some good success, particularly in Continental Europe, but also in London. But the market is predominantly in the U.S. now.

I don't know this number, but I would guess it's probably 80% to 90% in the U.S.

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

I wanted to ask you kind of a broad question about the way you're managing the business and see whether you're seeing some evolution into either a geographic management or kind of industry vertical and just kind of wondering whether the current segment reporting is undergoing an evolution process?

David G. Bannister

Without a doubt, as you could see from our prior announcements, we have set up 4 large regional profit centers and those are North America, EMEA, Asia Pac and Latin America and Latin America includes Mexico. Without a doubt, our feeling is the segments drive our product development, our strategy and our quality. You have to have a go-to-market strategy that's locally based and you have to be collaborative with the other groups. Our clients abroad are not as used to buying straight services that maybe a mature clientele is here in the U.S. They really want answers and solutions to their problems. And so therefore, it's a different go-to-market strategy. And it's our belief, Toby, that it's enhanced by regionalism. I think without a doubt, on a virtual basis, you're seeing more industry domain, again, go-to-market strategy develop. I think healthcare is now across all of our segments and they meet as if they are an industry group. They pursue opportunities together no matter what segment they're in. Real estate, clearly same thing. We touch in the real estate world in a wide variety of our segments and yet, they all cooperate very closely in their go-to-market strategy and where they're going. So the answer to your question is geography is a major thrust for us and the industry is moving quickly.

Jack B. Dunn

Yes. We've just added to the executive committee a person to head up our exploration and hopefully our capitalization on an industry initiative. We have tremendous depth and knowledge in things like healthcare, insurance, in construction, in financial institutions, in communications, media and entertainment, energy, not only in the U.S., but globally. We really have, as we like to say, that cadre of intellectual capital. And we need to, if you talk to our young people, we spent some time doing a deep dive on this and we really will be focusing on industry organization because I think in today's world, people really want -- they want expertise, domain expertise on what they're doing. So you will see that as a major focus and more to come on that.

Roger D. Carlile

On the last part of your question regarding segments and financial disclosures, my guess is over the course of the next year or 2, you will see enhanced disclosure around geography and some enhanced disclosure on industry. We're not prepared to abandon the current reporting model at this point in time. We think it has served us well and defines the business pretty well, but I think you can look for us to have more disclosure around those things going forward.

David G. Bannister

It's still the way we manage the business but the data points as we gather them and now that we can keep score a different way, I think we'll do our best to make that clear to you, so you can see trends in our different markets as well.

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

Last question for me. Any changes to incentive compensation to further encourage cooperation and cross-selling initiatives within the firm?

Roger D. Carlile

Well, one of the big things we did when we created the regions, the geographic regions and added that group of people to our executive committee was we now have an executive committee, incentive compensation plan that's consistent for all of those members. It's tied to the total firm results, so that drives they're looking at the firm and collaborating and we're looking at other techniques that have been recommended by our people, ways to build their collaboration reward and recognize that collaboration for cross-selling and working across geographies, industries and segments.

Roger D. Carlile

Toby, it's a good question and I'd say it's probably one of our most satisfying things to watch from the top of this year and this is a classic bottoms up build from starting with our younger people who want to collaborate and want to work and team and are less concerned, necessarily, about what particular segment they're in. The cross-selling the cross-collaboration, the handing off of one group to another with the idea of we're doing a better job for the client clearly, has picked up enormously in last trailing 4 quarters and it's really starting to pay off.

Operator

Our next question comes from Joseph Foresi with Janney Montgomery Scott.

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

I was wondering if you guys could talk a little bit about sort what your visibility in the pipeline looks like heading into 2012? I know, obviously, it's a little early to give any kind of guidance, but color on that would be helpful.

Roger D. Carlile

I'll start. I think a lot of this will -- I'm going to caveat it with everything, everybody caveats assuming the economy continues to act the way it is, I think the big drivers, we expect to continue, we don't see them backing off and that's just complex litigation. We think you're going to see more and more governmental invasion, not less in business. So ergo, you're going to see more and more competition issues, more and more business for economists in those areas. We think the management of strategic information in the digital age is core to risk management and we see that as a major driver for our Technology group among some of the minor drivers of investigations, deals, things like that. I think we clearly would love to see a more robust capital marketplace. It's not there right now, you guys know that better than we do. It eventually has to come back. We're in a great position to benefit from that but I'm not sure we'd be modeling that necessarily next year. But that would have significant upside for us if that was there. And then again, we don't want to be gloom and doom, but I would refer you to that relationship between distressed debt and default rates, because it's a very interesting study of a graphic relationship. And if that's there, we'll get busier globally in Corporate Finance, we're not -- we wouldn't pretend to be a rating agency, but we did have our corporate finance leadership with us yesterday, and they would suggest that they would expect to see more downgrades than upgrades in the high yield areas over the coming months. The underlying quality of credit to ratios and tightness of to covenants and so forth are pretty severe relative to norm. So we'd expect more downgrades.

Jack B. Dunn

If part of the theme of the call was to thank you for bearing with us on some of the investments we've made, we've made some pretty big investments in the financial services area with looking at our bank practice. We've made some significant investments in the insurance area. Made some -- continue to make significant investments in South America as we mentioned in terms of looking at some of the economies there that are either at full throttle or about to be throttled. So I think we believe and our people believe at this point, that we have a platform for growth next year. As you know, particularly, a pipeline business, we -- a lot of it comes to us on the fly, but if there's the activity that we think will be reflected in Asia and Latin America and if what we're seeing here on the regulatory front stays true. And sometimes, that tends to get a little softer right around election time. But I think our people are bullish on having the right practices right now that will attract the business that we think, on a macro basis, is going to be there next year. So we're entering the fourth quarter next year at this point there. And volition obviously, we're right in the heat of our budgeting process where people have to put their thoughts on the line.

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

Okay. And then just moving on, maybe you could just give us a little color on the pricing side of things. What are you expecting from maybe potential price increases that could be passed through, and maybe could just talk about the different segments including technology?

Roger D. Carlile

Joe, it's Roger Carlile. As Jack said, we're just -- we're into our budgeting. So we're meeting with our teams and we're starting to see that. But generally speaking the business, FLC they're seeing farm pricing and some amount of upward pricing as we look forward. You heard David speak about technology and what continues to happen there in terms of volumes and pricing, and while that process has slowed a bit in the last 2 quarters, I mean, you still face that issue, I think, technically as you look forward. Economic Consulting, I think, is one of the business, because of all the factors that Jack and Dennis spoke about earlier, they continue to be in high demand. They continue to have pricing power we think as they look forward. And I think Corporate Finance/Restructuring depends a lot on what happens as Dennis and Dave mentioned in terms of what happens with future flows. I mean, those businesses -- no doubt that business has had some downward price pressures as it's moved down in sort of the middle market cases. But if some of the larger us that we're reading about continue to happen, there's the opportunity, I think, for pricing to far more move up there as well.

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

Okay. The one last question on my part. It sounded like your response to the idea or the question that M&A has sort of slowed down rapidly, was that -- look, some of the cases that you're involved in are fairly large and should have a tail to them so that a quarterly shift in M&A doesn't necessarily have a major impact. Is that the proper take away there? I just want to make sure that we...

Dennis J. Shaughnessy

No, I'm the one that said that, I didn't want to mislead you. In the M&A side, those can be some the shortest time period cases we have just by their nature, because obviously, if you're successful quickly in getting a deal through, it tends to run about 120 days time period as I said. In some instances, we retain much earlier to do analytics and build market models to even see if the deals get through, but they tend to have a shorter fuse. Now some of them, as you're well aware, are being contested and we're in those and those at least on the surface don't appear to have a quick solution attached to them but they could. You never know if somebody has a change of heart. I mean, there's a lot of money involved. So I'm not sure some of our clients would have a change of heart, but the regulatory agencies as a Jack said, sometimes get a little more understanding in an election year and look for a little less controversy. So you could always see something, get approved faster. You could always see objections, get ameliorated or go away. So you could have some lumpiness in that because there are some big deals, but on the other hand, it's becoming a much bigger practice than it was 5 or 6 years ago. So I would hope some of that lumpiness gets smoothed out just by the law of large numbers.

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

So just to close up the argument. So in the past when there's been a dropoff in M&A, how have the numbers hold up and yield, is that how we should think about it going forward?

Dennis J. Shaughnessy

I think, when M&A drops off, I think what happens you see a flattening of it to maybe a slight quarterly decline. But then, oftentimes, as I said, M&A represents really just one of a 3-legged stool there and the other 2 legs, if anything, are more robust than the M&A assignments and that's the complex financial litigation and just the general governmental-driven competition issues.

David G. Bannister

M&A is also -- can be a significant factor in our Strategic Communications business. The nature of that M&A that they get involved with is pretty slow now, in fact I would call it very slow because that they would benefit more from volume, that there'll be a lot of activity going on and contention. And that's really what's not going to -- economics practices is really what Dennis has been addressing and their ability to continue to do well in large cases notwithstanding the fact that volumes are relatively low there. We do think that those -- the backlog or pipeline in that looks pretty good at least from what we can see for the balance of the year. And we do think that we have a market position there that would suggest that, if something important is going on, they were likely to be involved. Certainly, a pickup in volume there would help, would help that business even more. And when we look at corporate cash positions domestically and around the globe, and we look at the need for companies to demonstrate some growth, it's certainly understandable that they're a bit skittish now looking over the horizons, trying to figure what's going on. But people will get back in the deal business sooner or later. And we don't see Goldman Sachs or Morgan Stanley firing their whole M&A department, they all expect to have some business.

Jack B. Dunn

I think the sentiment here is that there are probably more things in a state of flux right now that would be good for us than would be bad. If you think about, for example, the Chinese using their capital as a way to extend their influence in Europe and in the United States. Perhaps that's going to be a wealth of business as they get vetted for acquisitions all around the world. Just as it has been a very big piece of business for us in Australia, where we have really been part of the process of both investments into China, but especially their attempts to invest outside of China in natural resources. So you think about that. You think about the outcome or the ripple effect from the global debt, sovereign debt scenario with the bonds in Greece. We've already obviously seen what that can mean on a selective basis. That will increase, not decrease. You have the issue where there have been the Shell company acquisitions and the use of new Imprimatur in Hong Kong and other places for Chinese accounting firms as opposed to big 4 global accounting firms. There's a bunch of stuff that as I say, if you just tested the consumer sentiment, if you would, here at FTI, people are relatively bullish about their businesses as opposed to where they were in 2010. So that's kind of -- we trade in terms of our outlook in the marketplace, which is much sentiment, because after all, most of our practices tend to thrive when there's some kind of lack of confidence or there's an issue. So that's the best I can sum it up for you. We think that there a lot of things on the line that could probably all contribute to a pretty good year for us next year.

Operator

And our next question comes from Arnie Ursaner with CJS Securities.

Arnold Ursaner - CJS Securities, Inc.

I wanted to focus a little bit on the CF&R segment, you mentioned, I don't know, 6 or 8 questioners ago that you had a pretty large job in the quarter. Was it 1/4 or 1/3 of the revenue, was it that magnitude of large?

Roger D. Carlile

No, no, no, Arnie, it wouldn't have been anywhere near that, but it was just a significant job that pretty much started in the quarter and ended in the quarter. Nothing of that magnitude. Maybe approaching 10% but I'm not even sure it was that much.

Arnold Ursaner - CJS Securities, Inc.

Okay. And what sort of impact might it have had on margin in that segment?

Roger D. Carlile

It wouldn't have been enough to move it that dramatic -- it helped, but it wouldn't have been enough to move it to dramatically.

Dennis J. Shaughnessy

I would dare say none. I think it was just a normal job.

Arnold Ursaner - CJS Securities, Inc.

Okay. You've spent quite a bit this year on what some would call atypical corporate spend, things like branding and systems. Can you quantify now that we're well 3 quarters into the year what you have spent, and how should we think about this number on a go-forward basis for next year?

Roger D. Carlile

Arnie, it's Roger Carlile. I think probably some of that spend, I would say, is actually less atypical, is becoming typical for growing global organization. So as Jack mentioned earlier in the question related to brand, while we've done a lot of things that are onetime expense oriented such as signage and converting things like our webpage and those things, we think we're going to continue to invest in that brand and maintaining that and growing it around the world. So I'm not sure that at least in 2012, I would consider that atypical. With respect to the IT, for example, building our platforms in Asia and EMEA and those places, again, those are sort of step function platform builds that give us the capability to grow there much more quickly and support that properly and that'll come back to margin in the future as the revenue then grows against that base because it's a step function, you don't have to add that cost. But it's not on atypical spend, it's really typical of a growing global organization.

Jack B. Dunn

Arnie. I think Roger parsed it the right way, I think, if you look at our run rate of revenues right now, obviously, you're at a $1.6-plus billion dollar business, and our spend for marketing and brand building as a percentage of that is actually very, very acceptable. Some people could argue, maybe, it should expand. I think where you'll see operating leverage come in is where we'll have to build these support groups globally and especially we just finished the one in Asia. So once it's absorbed, once you get a little more maturity there, then I would agree that, that spend rate should slow down. On the other hand, the growth rates out there are somewhat surprising and what happens is your step function there, the next step may not have the life you normally would have with the infrastructure you're putting out there, it may be a lot shorter and you may have to invest faster, but that should be driven by business. And if the business isn't there, you wouldn't make the investment. Clearly, right now, what we're seeing is the business is there and in a lot of these countries, there has been so much capital that has flushed in and continues to do. It's just hard for their infrastructure to manage it efficiently and therefore, they need people like us to help them do it, and I think that's one of the main drivers of why you're seeing so much growth out of South America or Latin America and Asia. So I think you'd see the operating leverage on the infrastructure support investments. I don't necessarily see a slowdown in our brand spend, because the percentage sort of feels right for building a global, a multibillion dollar global company.

David G. Bannister

Our corporate spend is about 5% of revenue now, Arnie. A couple of years ago, it was 7%, 7.2% to 7.3%. So we actually have gotten some efficiencies out of spreading these costs over a much larger revenue base. But I think at a 5% spend rate, that's not an unacceptable number for us.

Arnold Ursaner - CJS Securities, Inc.

So in theory, if your revenues grow nicely next year, we actually might see an increase in corporate spend?

Roger D. Carlile

On a dollar to dollar basis, yes.

Arnold Ursaner - CJS Securities, Inc.

Sure. My final question relates and maybe this is the wrong forum to attempt to answer this, but can you comment on your incremental margin on higher utilization? Clearly, in the summer quarter you had exceptionally high utilization in areas that typically were normally impacted by vacation schedules. How should we think about ongoing or future utilization rates and the incremental margin you might generate from those?

Roger D. Carlile

Hi, Arnie. It's Roger Carlile again. As you can imagine, and by the way you asked that question it's a more complex answer than we can probably cover in this. Because it depends on the incremental utilization is in a compressed time period, what are the realization rates on the projects and those types of things. The general simple answer is, of course, increased utilization for a given set of people adds incrementally to the margin at a very high level. But then you have to get to really understand that you have to dig in to the particular projects, what the realization was, did you have to add staff, was it a compressed period of time that you're doing the work versus over a longer period of time.

Jack B. Dunn

I want to just clarify one thing. We are by no means do we mean to imply that we'll have a rolling marketing budget that says we'll take 5% of whatever we get and put it in. We're mostly from Missouri on this. I mean, we grew up in firms that where you had 6,000 partners and things like that. You looked at expenditures very tough, and one of the things we scrutinize in each segment had helped scrutinize and certainly each geographic leader does is advertising budget. So we really fine tune it, we try to make it as targeted as we can. And if we would exceed our targets next year, that doesn't mean we'd automatically raise that budget and we put the budget that we have for next year will be put together as part of the budgeting process and we strictly adhere to. So we treat it as we understand what it is, and we try to the treat it accordingly.

Arnold Ursaner - CJS Securities, Inc.

I'd like to go back to that margin question. You had almost an 800 basis point improvement in Corporate Finance/Restructuring margin in the quarter as you got to 75% utilization. What I'm trying to get a feel for is going back to the original question, was it more onetime in nature or is this more of a sustainable level? You were 20% in Q1, 17% in Q2 and then you jumped 25.7% in Q3.

Roger D. Carlile

Arnie, I'll start and maybe David may pick up. Don't forget that in the second quarter, we have a special charge. We took actions and the greatest number of those actions were going to have positive savings impacts to Corporate Finance. I mean -- I think first of all, that was a structural issue and that is an ongoing issue. I mean, with those savings are there and we'll continue there as we discussed at that time. So I think you may be a little bit hard when you're looking just at the third quarter just to aggregate the impact of that plus the impact of the fact that our utilization was better than it has historically been in that month. And David?

David G. Bannister

Arnie, make no mistake. The margin in the second quarter was not acceptable to us. It was not one that we experienced before. It was not one that we're happy with. It's not one that we're going to continue. If you go back and look at the Corporate Finance margins in the 2005, 2006, 2007 period when volumes were relatively light. You had a pretty robust economy. You had margins in that segment in the 25% to 28% kind of range. We think we ought to try and manage that business even in challenging demand environments to have acceptable margins and 15%, 16% is not unacceptable.

Operator

And that does conclude our question-and-answer session. Mr. Dunn, I'll turn the call back to you for any additional or closing remarks.

Jack B. Dunn

It's been great. Again, thanks, everyone, for being on the call. And I assume, unless I hear otherwise and nobody is ever shy about letting me know, the format where we keep our prepared remarks to a minimum and emphasize the questions and answers is what you would like to do. And again, thank you, and we'll talk to you at the end of the fourth quarter.

Operator

And ladies and gentlemen, that does conclude today's presentation. We thank you for your participation.

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