FTI Consulting, Inc. (NYSE:FCN)
Q1 2016 Earnings Conference Call
April 28, 2016 09:00 A.M. ET
Mollie Hawkes - Director, Investor Relations & Communications
Steven H. Gunby - President and CEO
Catherine M. Freeman - Interim CFO, SVP, Chief Accounting Officer and Controller
Kevin McVeigh - Macquarie Research
Randy Reece - Avondale Partners LLC
David Gold - Sidoti & Co. LLC
Timothy McHugh - William Blair & Co. LLC
Unidentified Analyst - SunTrust Robinson Humphrey, Inc.
Please standby, we're about to begin. Good day everyone and welcome to the FTI Consulting First Quarter 2016 Earnings Conference Call. As a reminder, today's call is being recorded. And now, for opening remarks and introductions, I'll turn the call over to Mollie Hawkes, Managing Director of Investor Relations at FTI Consulting. Please go ahead, ma'am.
Good morning. Welcome to the FTI Consulting conference call to discuss the company's first quarter of 2016 earnings results as 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 27A of the Securities Act of 1933 and Section 21 of the Securities Exchange Act of 1934 that involve risks and uncertainties. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, future revenues, future results and performance, expectations, plans or intentions relating to financial performance, acquisitions, business trends, and other information or other matters that are not historical, including statements regarding estimates of our future financial results and other matters.
For a discussion of risks and other factors that may cause actual results or events to differ from those contemplated by forward-looking statements, investors should review the Safe Harbor statement in our 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 of Risk Factors and Forward-Looking Information in our most-recent Form 10-K and in our other filings filed with the SEC. Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as the date of this earnings call and will not be updated.
During the call, we will discuss certain non-GAAP financial measures such as adjusted EBITDA, adjusted segment EBITDA, total adjusted segment EBITDA, adjusted earnings per share, adjusted net income, and adjusted segment EBITDA margin. For a discussion of these and other non-GAAP financial measures as well as a reconciliation of non-GAAP financial measures to the most recently comparable GAAP measures, investors should review the press release and accompanying financial tables that we issued this morning.
Lastly there are two items that have been posted to our Investor Relations website this morning for your reference. These include a quarterly earnings call presentation that we will refer to during this morning's call and an Excel file and PDF of our historical financial and operating data, which has been updated to include our first quarter of 2016 results.
With these formalities out of the way, I'm joined today by Steve Gunby, our President and Chief Executive Officer and Cathy Freeman, our Interim Chief Financial Officer, Senior Vice President, Controller and Chief Accounting Officer. At this time, I will turn the call over to our President and Chief Executive Officer, Steve Gunby.
Steven H. Gunby
Thank you Mollie and thanks to everyone who joined the call this morning. As usual let me say a few words upfront and then turn it over to Cathy who will take you through the details of our first quarter and our updated outlook for the year. And after that the two of us look forward to your questions.
As you saw in this morning's press release this was a terrific quarter. On a number of key metrics this was the best quarter the company has ever seen. If you look at revenues we had organic revenue growth of over 8% and if you adjust for exchange rate it is over 10% which is the highest year-over-year organic growth rate that we have achieved in close to a decade. The adjusted EPS of $0.83 was up 46% versus the year ago and it is at an all time high.
So, this was a terrific quarter. What I thought I would do in these introductory remarks was spend a few minutes talking about where these results come from and a little bit about what we think they mean. And let me start with what I would characterize as the least important driver of the results. In this quarter there are some things that in any given quarter can cut positively or negatively versus expectations and a whole lot of those things cut positively this quarter. Those are things such as bad debt recovery, translation gains, the timing of success fees, those all cut more positively than we expected in this quarter.
So, the way I look at that there is a part of the drivers of this success that I just set aside, that I say please that is nice to have but it is not critical to have it, it is not that important on a long-term basis because it is kind of just happened to cut in our favor. So, I put those aside and I would say nice to have and Cathy will talk a little bit more about those items and the benefits to adjusted EPS in more detail in her remarks. So, I set those aside.
A second contributor to our strong results, you can see that partially as part of the drivers of the results in corp fin were due to some cyclical factors that as we all know exist in some of our businesses. Now let me put that in a little perspective. The bankruptcy market as a whole is actually not booming. Corporate default rates remain below their 30 year average. The effects of loose money are still out there. What has happened is that the corporate debt default rate has moved up substantially from the cyclical low we hit in 2014 and some of the sectors of our economy are seeing particularly increased activity. And so part of the cause of the growth in corp fin was some cyclical activity and so you can think about that as a second key point.
But let me move to the third contributor and underscore what I think is the most important point about this quarter for econ, for corp fin, and for the company as a whole. Which is a big part of the results in this quarter, when neither of the two things I just mentioned, their need is the onetime factors that happen to cut in our favor this quarter or the cyclical factors. But rather with the results of major efforts by individuals in this company and key groups of people to invest behind great businesses, to invest behind businesses where we knew we had a right to win where we weren't succeeding and moving those businesses ahead.
Those business building driver activities were the root cause of a huge portion of the out performance this quarter and it of course is the stuff that is the most exciting because that’s the most durable, that’s the basis for which you can think about growing this company. And so let me spend a little bit more time talking about that. And I'll illustrate that particularly with the two segments that outperformed this quarter the most and with one of regions but I think you actually can see those themes in every one of our segments and businesses right now and that’s an exciting part of where we are.
So let me start with corp fin because we just talked about corp fin. In corp fin of course there are more opportunities due to some of the cyclical factors I just mentioned. But opportunities are just opportunities. You actually have to win the opportunities. There is competition out there. It’s the strength of our people plus amazing activities we can work and so forth but also amazing activities over the last while when the markets weren't strong to build a brand position that strengthens our team to maintain our team. That led us to being selected in a huge number of places. For example it was obviously the economy and debt loads that caused the increased activity in mining this quarter. But with the efforts of our mining teams and the capabilities of our mining teams and the investment they’ve made in building brands and driving results in the past that led us to win a disproportionate jobs at mining.
I think you know but there is a whole list of those that include Peabody Energy, Queensland Nickel, -- Coal among a bunch of other ones. And the same thing is true in energy, we have a fabulous energy team based in Texas which for a while there wasn’t much energy work. They kept that team together, they grew that team, they grew the capabilities, they supported people, they attracted people. And so when the energy market comes back that team together with a terrific leveraging of the global platform teaming with people in New York and elsewhere around the world is what allowed us not just to participate but to win a disproportionate number of jobs. I believe right now we are working on 33 energy assignments in corp fin right now with more than 10 of them coming since the beginning of the year.
Those engagements again include some of the largest restructuring in bankruptcies in this cycle and engagements that range from upstream to midstream to oilfield services to manufacturing to parts and equipment. Yes, there are more opportunities than there were a year or two ago, but you have to win those opportunities. And it’s because of the capabilities of our team, the dedication, and the efforts they have made over the last years that our teams are wining.
A third example I'd like to point out relates to a business that we’ve talked about as has having difficulties in the past, our Australia corp fin business. We referred in the past to some of the challenges the teams are working through and when you face those sorts of challenges teams can make choices they can give up or they can say no, we have really right to win. We have great people, we have something relevant for the market, we have ways to grow our capabilities, we have ways to grow our visibility in the market, and I can do something about it. And our team down there chose to do something about it and the consequences of those efforts is that we are now leading the most visible restructuring case in that market, one of the most visible ones in years called the Queensland Nickel case as well as supporting the global team and the Peabody Energy operations, we are doing the lower Ashley restructuring and we are doing other ones.
That’s not a function of market factors, it is not a function of one off factors. That’s a function of great people dedicating efforts over sustained periods of time to leverage our position or to enhance our position. And it is just great to see not only where we have been historically successful but places where we have struggled. And you can say that other places around corp fin as well, our investments in growing our non-distress practices are also working. We’ve talked about these bets and I think there were skepticism about multiyear bets. Three years ago, two years ago we were losing money in some of those bets in Europe and we had a view that by this year we’d have those moving to profitability. And they are profitable and more importantly they now create a platform for future growth, for future investment from building and that is pretty exciting.
That is all in corp fin, let me move to another segment. We also had fabulous results this quarter in econ. It is actually the segment with the largest improvement year-over-year with record revenues up 23% and EBITDA almost doubled versus a year ago. I think in that segment as well, it is hard to trace the results to market forces. I think you can trace the results to the brand, the capabilities, the efforts and just the sheer capability of those organizations involved there. For example, I think most of us would say the M&A market is down year-over-year. Yet we had the strongest M&A related revenues ever in e-con this quarter, essentially the professionals there and our leading market position overall allowed us to win most of the big jobs in the market.
Compass Lexecon subsidiary had advised on the vast majority of the largest M&A and trust related assignments. We can't mention them all but what we can mention include the Staples and Office Depot merger, the Delium C [ph] transaction, the Aetna-Humana merger. Those are big important assignments and our team because of their reputation and the efforts they make on behalf of clients disproportionately gets selected and that was the primary driver results on the M&A side. And nor was the success in e-con limited to M&A.
The U.S. financial and economics practice which is the leading such practice in the world once again performed strongly this quarter with revenues up significantly year-over-year. It is a business where we continued to be invited to participate in the most important cases in the country ranging from continued litigation over the financial crisis to valuation of the World Trade Center to many other assignments. Actually in truth virtually every e-con subpractice and I have only mentioned two, significantly outperformed in Q1 2016 versus Q1 2015 and for the most part we can't trace that to one off factors or cyclical factors but mainly to the persistent efforts by world leading professionals to build the business.
Those are some of the things I am excited about in those two segments. I can't talk about all the segments, I think Cathy you are going to talk in more detail about segments but I will say, let me just mention FLC. FLC had more mixed performance but within the FLC it is the same story. You look at the FEDA practice, you look at complex litigation and investigations practice. I mean we are supported by outstanding client service delivery professionals in key markets around the world and we get drawn in to assignments. So if another part of FLC is weak, it is the strength of that performance of those people that allow our business to continue to grow and prosper and us to invest behind our professionals there.
And you can look at this from a regional perspective as well and I know Cathy I need to turn it over to you to go through all the numbers but let me take one more minute to illustrate this theme on a regional perspective. And I ask most of you on the call, how many of you think the European economy is booming. I suspect few of us would think it is and yet our EMEA business grew revenues 12% year-over-year and EBITDA grew substantially. Results again not due to a booming economy, not due to cyclical factors or one offs, it is the result of sustained investment in the right places behind the professionals that you think are worth betting on. And if you do that including sustained commitment to attracting great people, promoting people, promoting our brand, developing people that doesn’t work every quarter. But if you do that on a sustained basis they make a difference.
Before I turn it over to Cathy I want to make three other different types of points. First of all I have only talked to a couple of businesses and one region which of course is only a subset of our businesses. I just want to point out that in addition to a couple of our businesses substantially outperforming expectations which is e-con and corp fin.
Another thing that influences factor this quarter was that no businesses underperformed our expectations. That seems like a strange thing to note but if you think about the volatility of our business that is actually hard to do and almost every quarter somebody because of the volatility of our business underperforms. And significant -- zero significant underperformance doesn’t happen automatically. And I think that this quarter had not only outperformance by a couple but no place where we significantly underperformed in any place and that is a testimony to the efforts within those segments even where they are weak to redouble efforts, to win market share, or to have strong businesses continue to outperform.
The second point I would like to make is related to our tech business. We talked last time about the efforts we have underway to fully realize the power of this business. Strategies to both maximize the power of our market leading [ph] in technology Ringtail and to fully leverage the expertise of some of the world's best e-discovery professionals. That is a thought process that is still underway and we don’t have much to report today but I did want to let you know that we have approved some additional investment spend that will begin to ramp in the second quarter both for R&D for our Ringtail software and our Radiant software. And other than that unfortunately we will not be able to update in any other way today. More on that later in the year.
Lastly I want to make a more personal note and thank Bob Duffy who led or co-led our corp fin practice for a number of years. Bob some as some of you know is moving on. He has been terrific in terms of working to ensure it seamless transition and most important I want to thank him for leaving this segment in such an incredibly strong position. This is a segment with unbelievable talent and importantly one where we have committed to grow and have grown that talent over the last few years. Even in a face of a slow corp fin market we’ve committed to grow the talent in that business and done so successfully. We reinvested, we retained people, we promoted people, we attracted people from competitors and other places, we invested in adjacencies, we had people rejoin the firm, and we’ve grown that capabilities and headcount in that group enormously. By 18% -- headcounts grown by 18% alone in the last year and that’s happened at both the S&D levels and more junior levels.
Today I believe we have the strongest team we have ever had and I would also like to thank Bob for helping develop a great group of leaders in that business. We actually have in fact a great group of leaders below Bob. We have terrific people, people running our creditor practice, our debtor practice, our European operations, our Asian operations, our Latin America operations, the energy team, our TMT practice, our transaction services practice. I mean we have a group of leaders there who are committed to building the individual businesses and working collaboratively as a team to build FTI more generally. That is a strength that is an incredibly powerful platform on which to build.
So I want to say thank you Bob for your tireless efforts in building that and we wish you well going forward. With that let me turn the call over to Cathy. She is going to walk through the quarter in more detail and then we’ll open the floor for your questions. Cath?
Catherine M. Freeman
Thanks Steve. Just to start this stage I am going to start with a review of our quarterly consolidated and segment results. And then conclude with our revised guidance and outlook for the company. Turning now to slide 4.
Revenues for Q1 were $470.3 million up 8.8% from prior year and up 6.4% from Q4, almost all of which was organic. Excluding an estimated negative impact of foreign currency translation or FX, revenues increased 10.4% compared to the prior year quarter. Adjusted EBITDA in the first quarter was $68.9 million or 14.6% of revenues up $10 million compared to $58.7 million or 13.6% of revenues in the prior year quarter.
Sequentially adjusted EBITDA was up $33.5 million from $35.2 million or 8% of revenues in Q4 of 2015. Fully diluted or GAAP EPS was $0.73 compared to $0.57 in the prior year quarter and $0.25 in Q4 2015. First quarter EPS included a special charge of $5.1 million for severance related to the previously announced headcount reductions in our technology segment and a $1 million charge for an increase in our estimate of a future contingent consideration or earn out payment related to an acquisition in our strategic communications segment.
These items reduced EPS by $0.08 and $0.02 respectively. Adjusted EPS for Q1 which excludes the special charge and the increase in our contingent liability were $0.83 which compared to $0.57 in the prior year quarter and $0.24 in Q4 of 2015. Within our GAAP and adjusted EPS on a below the line basis, a reduction in interest expense as a result of our debt restructuring in the third quarter of last year positively impacted EPS by $0.10 compared to the prior year quarter. This was partially offset by our current quarter effective tax rate of 37.6% compared to 33% in the prior year which negatively impacted EPS by about $0.06. As you may recall last year we had a tax benefit related to a reduction in our state tax liability which lowered our rate by about 4 percentage points.
Turning to our segments on slide 5, in Corporate Finance & Restructuring revenues in the quarter increased 19.7% to $127.2 million compared to $106.2 million last year. Excluding the estimated negative impact of FX, revenues increased $23 million or 21.6% compared to the prior-year quarter. This increase in revenues was driven primarily by higher demand and realized rates for the segment’s distressed services in North America. We continue to win large mark key bankruptcies during the quarter in mining, retail, and media and also saw a substantial uptick in energy activity as Steve mentioned.
Distress activity was strong in January and the beginning of February but ramped up even more in the back half of the quarter as our pipeline and wins generated more work for us than we expected. Potentially revenues were up 14%. Adjusted segment EBITDA for the quarter was $31.6 million, or 24.9% of revenues as compared to $22.5 million, or 21.2% of revenues in the prior year quarter. The quarter over prior year quarter increased in adjusted EBITDA and margin was driven primarily by increased North American restructuring demand with improved leverage on larger cases and higher average realized rates. We also recorded lower bad debt expense due to recoveries of amounts previously reserved.
On a sequential basis adjusted EBITDA increased from $18.9 million or 17% of segment revenues in Q4 to $31.5 million or 24.7% of segment revenues this quarter. Which again reflects the strength in our restructuring process as well as seasonal strength in our North America real estate advisory practice which is heavily engaged in tax work in the first quarter.
Moving to Forensic and Litigation Consulting or FLC, revenues declined 3.5% to $119 million in the quarter compared to $123.3 million in the prior year quarter. Excluding the FX impact, revenues decreased by $2.6 million or 2.1% compared to the prior year quarter. Revenue declines in the quarter versus the prior year were primarily due to lower demand in our health solutions and global construction solutions and dispute advisory practices. This was partially offset by higher demand for our financial and enterprise data analytics or FEDA practice as mortgage-backed security cases continued to be a strong contributor. We also saw improved demand for our investigation services in North America, EMEA, and Asia. Sequentially revenues were up 2%.
First quarter EBITDA was $19.8 million or 16.6% of FLC revenues compared to $22.1 million or 17.9% of segment revenues in the prior-year quarter. The decline in adjusted segment EBITDA margin in the quarter versus prior year was primarily driven by decreased demand in our health solutions and construction solutions practices, again offset partially by higher utilization in our FEDA practice coupled with lower bad debt and reduced personnel cost related to health solutions, overhead reductions taken over the course of the prior year.
On a sequential basis, adjusted EBITDA increased from $8.8 million, or 7.5% of segment revenues in Q4 to $19.8 million or 16.6% of segment revenues this quarter with higher revenues, lower derived cost some of which was related to the headcount reductions and the sale of our TSC business in the fourth quarter and lower SG&A cost largely related to reduction in bad debt expense.
In economic consulting revenues increased 23.2% to a 130.7 million in the quarter compared to a $106.1 million in the prior year quarter. Excluding the estimated negative impact of FX, revenues increased $25.9 million or 24.2%. The increase in revenues for the quarter was driven by two key factors, the first being substantially higher demand for our M&A related antitrust services. As Steve mentioned we had our highest quarter of M&A related revenues ever in this business driven by an increase in the number and average size of engagements. And the second factor related to strong performance broadly across the other U.S. and EMEA based practices in e-con driven by increases in financial dispute, international arbitration, and regulatory dispute. Sequentially revenues were up 10.2%
Adjusted segment EBITDA was $21.3 million or 16.3% of revenues compared to $11.6 million or 10.9% of revenues in the prior year quarter. EBITDA margin improvements were driven by higher utilization in North America, higher realized bill rates in EMEA and North America, lower bad debt expense, and a reduced percentage of overhead cost in relation to the revenue increase. On a sequential basis adjusted EBITDA increased from $18.8 million or 15.9% of segment revenues in Q4 to $21.3 million or 16.3% of segment revenues this quarter.
Turning to technology, technology revenues declined 11.7% to $48.3 million versus $54.7 million in the prior year. Excluding FX, revenues decreased by $5.7 million or 10.3% from the prior year quarter. The year-over-year revenue decline was largely due to reduced demand for both cross border investigations and financial services litigation. This was partially offset by a significant increase in M&A related second request activity.
As we have seen in the past couple of quarters our technology results are being impacted by the roll off of a couple of very large multinational assignments. The team is working hard to sell the pipeline and continues to win new engagements at a solid pace but not at the same size and scale. And as you know in the M&A space we have seen an uptick in activity, these engagements usually tend to be much shorter in duration than our investigation and litigation work.
Sequentially revenues were up 3.7%. Adjusted segment EBITDA for the quarter was $7.8 million or 16.2% of segment revenues compared to $10.1 million or 18.4% of segment revenues in the prior year quarter. The decline in adjusted segment EBITDA margin was due to lower demand from managed review services related to the decline in these large scale cross border engagements that I mentioned and lower realized pricing for our consulting services related to the mix of client engagement. This was partially offset by a timing related decline in research and development expenses.
On a sequential basis adjusted EBITDA increased from $6 million or 12.8% of segment revenues in Q4, to $7.8 million or 16.2% of segment revenues this quarter. And turning to our last segment in strategic communications revenues increased 7.1% to $45.1 million in the quarter compared to $42.1 million in the prior year quarter. They increased $4.4 million or 10.4% year-over-year excluding FX impact.
The increase in revenues was primarily driven by higher demand for the segments financial communications and public affairs offerings which was partially offset by a decrease in revenues from reputational crisis related work. Sequentially revenues were down 7.5% as our first quarter is historically our weakest quarter when clients with recurring and discretionary work are normally sorting through their budget spend for the year.
Adjusted segment EBITDA was $6.1 million or 13.5% of segment revenues which was relatively consistent with our prior year quarter results of $5.8 million or 13.7% of segment revenues. On a sequential basis adjusted EBITDA decreased from $7.6 million or 15.6% of segment revenues in Q4 to $6.1 million or 13.5% of segment revenues this quarter.
Turning to our geographies on slide 6, in North America revenues were driven by the strong U.S. based demand we mentioned in both our corporate finance and economic consulting segments. In EMEA our economic consulting segment was the largest driver of positive year-over-year revenue and adjusted EBITDA with particular strength in our international arbitration and complex dispute practices in this region.
Asia Pacific revenues improved year-over-year as we realized improved performance in Australia as Steve mentioned which was partially offset by softness in other areas of the region. North America continues to lag with softness in our investigations and construction solutions practices.
Turning to slide 7, our cash and cash equivalents were $114.5 million at quarter end. And our first quarter as you know we normally consume cash as we make our annual bonus payments. Therefore net cash used by operating activities was $33.1 million, compared to net cash used by operating activities of $51.3 million in the prior-year quarter. This $18 million reduction in our use of cash year-over-year is largely reflective of our lower DSO in the quarter of 98 days compared to 101 days in the prior year quarter.
During the first quarter, we spent $2.9 million to repurchase 85,100 shares at an average price of $34.12. And we borrowed an additional $7 million under our short-term revolving credit agreement to cover our annual bonus payments previously mentioned. Our net debt defined as debt minus cash increased by $42.3 million from December 31, 2015 but declined by $93.2 million from March 31, 2015 or the same time last year.
Now turning to our revised guidance, I would like to address two questions. First what drove our over performance in the first quarter and second, how did we consider this as well as other factors in developing our guidance for the remainder of the year. To address the first point as Steve noted this was the highest quarterly adjusted EPS on record. Worth noting about $0.09 of adjusted EPS in the quarter were related to favorable discreet items we did not expect including success fees that were booked in Q1 that we expected to receive later on, lower than normal bad debt expense which you heard about in my discussion in several of the segments impacted by some recoveries of receivables reserved in prior period, lower corporate bonus expense, and positive FX transaction gain which relate to the re-measurement of receivables and payables that are to be settled in different currencies. To be clear these items were not significant individually and could be for or against us in any given quarter. But in this quarter they all benefitted us.
Second, but more importantly we enjoyed exceptionally strong performance as noted in both our corporate finance and economic consulting segments where we saw an acceleration of work in the back half of the quarter on multiple large engagements in both the restructuring and the M&A phase. So, with this as a back drop we now estimate that full year adjusted EPS will be between $2.15 and $2.45 and revenues will be between $1.84 billion and $1.87 billion.
So, now turning to the second question, what factors did we consider in developing our new guidance range. As just mentioned we considered the strength of our Q1 performance and our view about its sustainability. It will be hard to predict another record quarter. We considered our current backlog of activity where we have a better visibility into the second quarter but limited visibility into the second half of the year. And we considered our evaluation of external market factors.
Although we would like to have a crystal ball, in the short-term horizon we are still impacted on both the high and low side of our guidance range by external event driven activities. The external factors that impact our ability to predict the back half of the year with more certainty include among other things declines or increases in M&A and restructuring activity, shifting commodity prices in particular the price of oil, and lastly the uncertainty created in the financial markets by both political and regulatory events. And this year two examples include the U.S. presidential election and the vote on whether or not Britain stays in the European Union.
These external factors may positively influence one segment and negatively impact another. The timing and impact of which is hard to predict for any one segment in the short term. And beyond these macro factors there was always some uncertainty regarding the timing of the roll off and replacement of big event driven case work which certainly helped us in the first quarter. As an example part of the e-con run up was due to an acceleration of some pretrial work in February and March on a large antitrust engagement. As it turns out, the case will not go to trial and we will not be called on to testify. So as quickly as that additional work hit it, it will just as quickly drop off.
That said to give a little more color by segment, in corporate finance and restructuring given that some of the large bankruptcy assignments are beginning to ramp down or is scheduled to end in the near-term and new ones may not emerge we don’t expect the second half of the year to be quite as strong as the first quarter levels. Although, we expect continued strength in the second quarter and we do see new opportunities in energy as Steve mentioned.
In FLC we are seeing some strong demand in our North America FEDA practice and in both North America and EMEA investigations practices. But we have experienced a slowdown in our Latin and EMEA construction solutions practices as engagements have rolled off and [Technical Difficulty] in the first quarter of 2016. And it appears that increased U.S. regulatory scrutiny may lead to a substantial decrease in the number of companies willing to contemplate large value M&A transactions.
In fact deals over $5 million were down 24% compared -– for technology as Steve mentioned and we discussed in detail last quarter this industry is through tremendous change and we are continuing to evaluate our options. But we are ramping up our investment in the development of both our Ringtail and Radiant platforms which will partially offset cost savings from the actions taken during the quarter.
Steve mentioned, the spending will begin to ramp up in Q2. And at this time we currently don’t have any large multijurisdictional engagements in the pipeline and are cautious about M&A related second request activity. Additionally next quarter we will have some tough comparisons to our prior year in M&A revenue as we had an unusually large M&A engagement peak in Q2, 2015.
Finally in strategic communications we believe external headwinds such as Bradford [ph] and the U.S. presidential election may negatively impact our growing public affairs business. Additionally our energy services may continue to be impacted by low oil prices as our small and mid-cap clients in this space reduced discretionary spending.
Turning to our investment spend which we outlined last quarter, it is important to note that two thirds of our spend for 2016 is planned for the second half of the year. This uptick in investment is included in our guidance considerations for the back half of the year.
To summarize, we had a great first quarter which is likely not to be sustainable at the same rate given the confluence of events that led us here. But we still see a strong second quarter given our current view of backlog activities specifically within corporate finance although not as strong as Q1. We have a number of market factors that could impact our event driven business as in the second half of the year both positive and negative and we believe that our full year guidance contemplates both the up and down side of these factors as we see them today. On a middle ground within our guidance range our back half EPS could be 50% to 60% of the first half considering all of the impacts we have mentioned and our seasonably low fourth quarter.
To conclude, the key takeaway here is that we had a terrific quarter. We certainly don’t expect our annual performance will equate to Q1 earnings times four and therefore we tried to provide our view of the most important market resting opportunities and how they can impact us. However, even as we hit the low end of our guidance we will have delivered a 31% increase in adjusted EPS over the last two years and at the mid-point we will deliver about a 40% increase.
As Steve said we are moving forward by the power of our people. We are making steady progress that is not all driven by cyclical performance or an expected item. We are very excited about our first quarter results and the progress we are making across the firm. With that we will open up the call for your questions. Thank you.
[Operator Instructions]. We will take our first question from Kevin McVeigh from Macquarie.
Great, hey, congratulations on a great outcome on all fronts. Hey, Steve or Cathy I wondered can you help us understand on the corp fin product side how much of that is counted distressed versus non-distressed and if we think about this restructuring cycle how does it -- how should it compare to the last two in terms of duration?
Steven H. Gunby
Cathy, how is your crystal ball.
Catherine M. Freeman
I think in terms of the first quarter it's non-distress is still part of the picture but it is largely related to restructuring engagements as we talked about in both retail, media, energy, etc. and mining. So, I think as I mentioned, we do have a backlog and a strong backlog into the second quarter. But those are much harder to predict in the second half of the year in terms of when they ramp up. If our normal restructuring work turns into bankruptcies, the timing of that is hard to understand. But I say about 70% in the quarter really relates to the distressed activity.
Steven H. Gunby
And Kevin in terms of the crystal ball, look it -- as you know I am not from this industry but I talked to all our guys and even they don’t have a crystal ball. I think the thing that would give you encouragement over the long-term is we still have a very loose money situation out there and if you look at the 30 year average of bankruptcies, even with the comeback in mining and energy across corporate sectors as whole we are not at the 30 year average. And so if you say okay, sometime over the next ex years we are going to get back to average of maybe above average that could be a bullish thing.
Now the reality is though we have loose money out there and if oil prices go back up and commodity prices go back, things that are fueling the current mini boom in the -- or the boom in those things could go away. And so you don’t know. So, I guess I would say I think there is fundamental positive forces over the next ex years but whether that could mean we go backwards for a few quarters, the guys in the segment say they could. We don’t expect that in the second quarter but even by the second half or fourth quarter of this year we don’t have much visibility. So, really I am telling you that my crystal ball is positive over an extended period but pretty cloudy beyond a couple of quarters. Do you have a better crystal ball Kevin.
If I did I wouldn’t be in this business Steve.
Steven H. Gunby
Okay. Thanks, good question, anything else.
No, all set, congrats.
Steven H. Gunby
Thanks very much, nice to hear your voice.
And our next question comes from Randy Reece from Avondale Partners.
Steven H. Gunby
Good morning Randy.
Good morning. I have been impressed by the ramp of headcounts in corporate financing and restructuring and e-con as well. Supports even though there is some potentially unsustainable surge of business you have an underlying belief in the strength that to some degree, how when you do increase headcount there how flexible is that, when I see an increase like that is there a portion of that that is attached specifically to engagements and would go away pretty quickly or do you -– are you a little more careful about making decisions about adding heads in that business because you can't flex it as quickly?
Steven H. Gunby
I think it’s a mixture of two if I could comment on that, right. And let me use this as a pivot to making to try underscore a strategic point which is, look when we are committed to organic growth which we are we are committed to adding great heads and keeping them even if the business isn't strong for a few quarters. And I think that is the essential element of organic growth and you have to have a belief that with the right best heads if you put them in the right places where we have a right to win you keep those people leaving if times are slowing. My experience is, the slow periods don’t last for more than 12 or 18 months. Great professionals figure out what to do. And so that’s the strategy we are on.
Now there is a second part which is in professional services firm, there is a certain amount of turnover at any point. When you hire people in there is 15% turnover a year in the junior ranks as people go back to graduate school or all that sort of stuff. And so that is actually -- that is also a phenomenon. So it is not like when you hire 18% new people, if the business goes totally away you are stuck with everybody because some there is natural attrition on that but we are going to stick with the people who we believe are key to the future.
That is a commitment we are making to those people. It’s a commitment we are making to our future. It is frankly a commitment we’ve made over the last two years and in a couple of quarters it didn’t look so good based on it but if we hadn't made those commitments we wouldn’t have had the capacity and energy and elsewhere to do what we are doing now. And so that’s part of what we are doing. It may create a little bit more volatility in quarters. But I think it is part of what leaves me to believe we are sustainable growth company on a long-term basis. So does that help Randy?
Yes, one more question really quickly. If we look over the last few years in FLC, there have been periodic dips of utilization rates into the low 60s and there is not always -- usually not driven by just seasonal headcount additions but significant fluctuations in activity levels. Wondering you made some progress over this quarter after being at low utilization to the second half of last year, I am wondering what your strategic intent is as far as objective for a utilization rate in FLC?
Steven H. Gunby
I am not sure we have specific utilization metrics that we talk about but maybe I can give a more -- I mean in terms of intent but let me give maybe a summary of sort of the conversations that I’ve had with the leaders there and the leaders are having among themselves. I think where we have low utilization, where we believe we have a business that is in a process of establishing itself we’ll tolerate that for an extended period of time. Where we have a little utilization in a great business like right now I think in construction in North America we are not having the utilization rate that we’ve historically had. That’s a great business. We’re not going to do stupid things. And now where we have low utilization of businesses, where we don’t really have a theory on what the right to win is and we need to take action on that. And we as you know we sold off our TSC business in Brazil, we took some action in some overseas markets, and so it’s a mixture. But I think again, look FLC is one of the strong powerful core businesses for us. I think we have a real right to grow it in the U.S. and overseas. It is a matter of how do we make the right bets, how do we make sure we monitor those and make sure they are working and then re-bet and then of course correct if we make a mistake along the way. And I think that is how we are thinking about it. Does that help?
Yes, thank you very much.
Steven H. Gunby
Thanks very much.
And our next question comes from David Gold from Sidoti.
Steven H. Gunby
Good morning David.
Hi, good morning. Just a little bit by way of follow-up actually to that last question. Thinking more broadly, I mean I guess few goes out to the quarter, and it sounds like obviously second quarter going well with some maybe questions from the business lines about sustainability. But if we layer that over how to think about you having to continue to balance that utilization with hiring, how should we look at that, can you give us a sense for hiring plans in some of the business lines anywhere you might be adding this year particularly in light of the demand you have and what you view as sustainable?
Steven H. Gunby
Let me just check here whether we do -- do we give our hiring plans out, no. I guess we don’t, I am asking the colleagues here.
Even if it is broad brush.
Steven H. Gunby
Look I would say broad brush we are committed to growing headcount in -- look in every business we have opportunities to grow. What you will see is that sometimes you can't see that in the numbers. Like for one year I think the first year I was here we grew headcount in a subset of strat-com substantially but we also shrunk headcount in another subset of strat-com. And so you look like the headcount for strat-com was flat. And then last year we continued to grow headcount in the places we are betting on in strat-com and because we didn’t have the offset it looked like we were growing.
I would say that's the strategy we are following. We don’t have -- it is sort of hard to think about it because we have five segments that we report on but each of those segments have subsegments and then frankly each of those subsegments have geographies. Right, I mean our position and the talent level we have in Spain isn’t the same thing as the talent level we have in Morocco actually, we don’t have operations in Morocco. But -- and so you make these individual bets and you say okay we like this team, they are doing the right stuff lets, we believe they can grow they can’t grow without headcount so let's support them. And we make different decisions in other places.
So, that is the planning process that we go on. And I think it is an important -- it is a pretty basic process but I think it is actually the most important process in some ways and a professional services thing because forecasting revenue is a hard thing but you can actually forecast to deliver on growth of people and then if you make the right bets overtime at least most of the bets turn out to be right. Overtime you grow the business. So that is how we are thinking about that and that is true with an FLC as well as -- I would say that is true for every segment. Does that help David a little bit.
It does, I guess from looking at sort of we are more curious on is -- when we think about utilization, particularly you are thinking about economic consulting at 79%, historically not a sustainable level. Obviously there were some factors but we do think there will be some cooling there. But basically what we have is how does one manage that, could it go another quarter at 79% if need be?
Steven H. Gunby
Well, we would love it to go another quarter. We would love it to go another 10 years of 79%. I doubt it will is my guess. I mean as Cathy mentioned we had some stuff that surged in the first quarter there and that kind of which ended actually by the end of the quarter or right at the beginning of this quarter, I can't remember which. So, I doubt we will continue at that run rate. But I am just going to say two things, I mean we are not -- the thing that is interesting about organic growth, you don’t have to run at 79% to be building a business both for your professionals but also for your shareholders. I mean, if you add staff and add leverage to your senior people and the additional staff is reasonably utilized then lower than your current the average utilization goes down. Your profits can actually go up and one of the issues we had in the past was we had allowed our leverage ratios to get out of whack on the low side and one of the things we are doing is rebuilding our leverage ratios.
So I think at some of our businesses you could say at the same utilization rate we are actually making more money than we did two years ago. And that is because of increased leverage and so you know we’re looking not at utilization as a single metric. It is not a really good metric by itself, it is not even really a very good metric to think about how to build a firm or to build shareholder value. I mean you got to look at it for your tiny --utilization for extended period of time, you have to ask questions. But we’re looking at building businesses and building over a medium period of time real returns to our shareholders. And so utilizations are kind of funky metric in that regard.
So I am pretty comfortable that if e-con drops utilization we are not going to do something stupid there. We got a great business there and we are investing in that business and I just asked the asked the guys in e-con where else can we grow and where can we extend. And if we have any good ideas we are going to continue to invest and if it means a quarter or two utilization levels are lower, if in 6 and 12 and 18 months our profits are higher and our brand is even higher I’ll make that trade off anytime, does that help?
It does, perfect. Thank you.
And our next question is from Timothy McHugh from William Blair.
Steven H. Gunby
Good morning Tim, how are you?
I am good, how are you doing?
Steven H. Gunby
We are doing good, thanks.
Alright, a couple of questions I guess one let me just ask on the restructuring side you have talked about it in a couple of different ways but and I think you were a little cautious on how significant the energy sector and energy and mining if I drove them together might be for you guys say in terms of given this relative to the strength you had last year. And I’ve seen you win a few things, I guess were you just surprised at the things you won and the strength you have seen there. I mean has your view changed on I guess how significant that might be for you guys?
Steven H. Gunby
Yeah look, I think there is several questions embedded in that let me take a crack and Cathy you can correct me if I say something wrong. I was surprised not about our strength in those sectors but just how strong this quarter was. And remember we were cycling really strong year last year. I think we did better than the market as far as we can tell last year and so even though we had -- we know the strength we have in mining and we know some of the strengths we have in energy we were not predicting as strong as we have in this first quarter. And part of that was that a lot of the stuff that hit this quarter wasn’t even visible to us early in the quarter. Our January was very consistent with our plan for the year and then as I mentioned like in the energy side we sold a whole bunch of stuff after the first of the year which I think we had in some backlog as theoretical but they were timed for later in the year. Some of this stuff moved faster than we thought and I think that’s the dynamic nature of this. My sense is there is a dynamic nature in all of our businesses and in a lot of times we have gotten caught on the negative side of that. Here I think we got caught on the positive side. We did not anticipate a strong as the business was going to be in the first quarter. And even into January that wasn’t their projection. So did that start to address part of your question.
Yes, I think I was trying to get to the sustainability…
Steven H. Gunby
Yes, that’s a crystal ball question that Kevin also asked. Look we don’t know. You have visibility into the second quarter and then you have backlog reports which are the same backlog reports that we used to forecast our first quarter. And I think some of the work we did in this first quarter was stuff we anticipated doing later in the year. So when someone sensed we borrowed against later in this year and then some of this is incremental. So we’re certainly not anticipating at this point four quarters like this first quarter. Cathy you want to add something.
Catherine M. Freeman
Yes, the energy sector I think the one thing that was a little bit surprising is we won more work on the debtor side. You may have been seeing last quarter that our sweet spot has been on the creditor side.
Steven H. Gunby
Particularly in mining we won that.
Catherine M. Freeman
In mining and a few in energy and on the debtor side that work can go on a little bit longer and its usually a little bit -- at a little bit higher rate. So again that’s maybe not the crystal ball again, but that’s a bit of a shift from what we’ve seen historically.
Steven H. Gunby
But let me say this again, I just want to reiterate although we were cautious on how much incremental improvement we saw this year versus last year when we first forecast this year, it has never been because of a lack of confidence in that practice. I think we have the strongest professionals in that practice of anybody. It’s a matter of just how much we outperformed last year and not assuming sustained outperformance. We got surprised, we got even more sustained out performance in the first quarter.
I am reluctant to say we’re going to just I’d like Bryce Harper to continue to hit nine home runs in every 14 games this year which would set a new record. I think most people would think he is unlikely to continue at that rate although he is a great professional. He is maybe the best baseball player in the world but he is not going to hit that many home runs. And I think that’s the same thing we got to believe here. But we have a lot of confidence in this business not just in the U.S. but around the world. And we are excited about it over the rest of this year and going forward. Does that give some help Tim?
Sure, yes. And I guess just because it’s been in the process I think it is probably and I am getting questions, you mentioned the change in the leadership and I think there is a couple of people who left the ranks in their corporate finance segment. Their names were attached to some big kind of more retail type of stuff last year, what's the risk I guess or the impact around that and is that any part of what the commentary you are giving about the run rate I guess you would expect going forward.
Steven H. Gunby
Yes, that’s not the key part of the commentary or the run rate going forward but look I think it is -- look we are in professional services business. You gain lots of people, you sometimes lose people, a lot of the people you lose you are not concerned about, its mutual or it’s a normal attrition and sometimes you lose people who you really like. And when you lose people you really like that hits you. It hits you emotionally really and it hits you emotionally in terms of particularly the people they work with closely. Because contrary to popular belief consultants are human too and there is tight relationships and those sorts of stuff. And so you have to work through those things when you lose good people.
But I mean look from an investor perspective you got to put some perspective on that too, right. I mean, we have gained a huge number of great people over the while. I mean you never want to lose people you want to keep and my sense is over the while we’ve done way better than the average firm on that. Our attrition rate overall is lower than the firm I came from which was a great firm. Its lower than just the averages that Holly gets from some industry sources. And net, net over the last years for a long time we have been net gainers and particularly in the last couple of years as we’ve committed to organic growth we have been net gainers. We been -- we’ve had people return from other firms who had left us earlier. We’ve had people just call us from other firms and say we want to join you guys, you guys are moving. And so it is always sad when you lose good people and we will fight to make sure we don’t have too many good people leave ever. But from a perspective I would say net, net we are moving ahead and our headcount is obviously substantially up and I'd say the practice has never been stronger than it ever has been in the past, does that help Tim?
Yes and then just one last question. You talked about what the economics of the timing I guess one case as you did a bunch of work ahead of a potential trial that I guess isn't going to end up happening. How much of the strength is really one case? I recognize you can have some big cases but and trying to think about what was just kind of a more of a steady improvement if you will in the economics practice versus if you are highlighting kind of a lift from one case that won't continue trying to can you help us think about how much of an extra lift if you will that was adding in the first quarter?
Steven H. Gunby
Let me take a crack and then let Cath add any details. It depends on which part of our segment, I mean I think in general our e-con business is not as hit business as some other business where like our tech business at some points in time has had a very high concentration ratio and general e-con is not that. Now within that our M&A business given the prominence of some of the M&A assignments can have real spikes in any given quarter, where we’re involved in the biggest M&A cases in the world and the stakes are huge. And if you are getting ready for trial in one of those and it’s a contested, a major contested thing there can be a lot of people on that. So for any small period of time as a percentage of our M&A revenues one client can spike. As a percentage of our overall e-con revenue is less and of course on the firm is less. So that’s the general answer I’d give, I don’t -- you want to give any more specifics Cath or not.
Catherine M. Freeman
No, I think it certainly was maybe part of our unexpected ramp up in February and March. So in terms of the out performance that we saw or heard of it. But if you look at just our internal metrics, in terms of – cases and average size [ph] per case they certainly have been ticking up from the end of the year kind of at a steady pace. That’s more than one but again we pointed out that one in terms of it is kind of a quick spurt in February and March and how it impacted our expectations for those months.
Steven H. Gunby
And our next question comes from Tobey Sommer from SunTrust.
Good morning. This is [indiscernible] on for Tobey.
Steven H. Gunby
Hey Kwan [ph], how are you?
Good what is your expectation for CAPEX this year and maybe give us a sense for how much would be tech related?
Catherine M. Freeman
I think currently we’re estimating our CAPEX to be about $35 million to $45 million and which is what we thought at the end of the year. We’ll continue to take a look at that as time goes by but that does include our estimate around technology spending which is not -- it’s a part of it but in the other part of the spending includes our infrastructure spend, our facilities, lease spending, etc. So it does include some of that. And as I talked about some of the investment that we are spending will not be capitalized but will be expensed certainly as we are in the predevelopment stage. So, there will be higher expense which we’ll see in the P&L and then somewhat of a normal trend within the capital portion.
Got it, thank you.
Steven H. Gunby
And it appears there are no further questions at this time. Mr. Gunby I’d like to turn the conference back to you for any additional or closing remarks.
Steven H. Gunby
Well thanks everybody. Thanks for your attention and thanks to everybody to put your support over this last file. I mean let me maybe just close with echoing some of the comments Cathy that you made at the end of your speech. This was a terrific quarter and that’s nice in and of itself. I think we really have two messages here, one was the one that Cathy want to make sure you heard. Which is don’t take the first quarter and multiply it by four. And because we have some one-off factors in there and there is cyclical factors and there is some cyclical forces particularly in the second half of the year that could cut against us. And we need to take those seriously. And so that’s the one message.
The other message though is the one that those of us who are not trying to just forecast quarters but are trying to say where is the company is going I think that you should take away from this or at least I take away from this is this is a real testament to what our teams are doing in the marketplace. And yes, I know some of you have concerns. Sometimes we invest headcount and they are sitting there idle and we are going to get that wrong sometimes. We are not going to get that right all the time. But my experience in professional services if you have terrific people and you bet behind those people and you give them the license to go follow their head, challenge their proposition, make sure they are real and then give them the headcount to try to build the business and they are going to succeed a lot of time. And they might not succeed in the first quarter but they are going to succeed a lot of the time. And if you have that ethos and you have challenges along the way. But you have that ethos and that level of support you can build a business, at least if you have great people to start with and we do. We have great people lots of places around the world. And that is what we’re doing.
This quarter it happened to show up really terrifically, some other quarters it may show up on the other side. The real question to me is sustainably is it going in the right direction and I believe it is. We will be, from an investors point of view, if we hit the mid-point of our range as Cathy said this will be the largest two year gain in EPS in a long, long time. I think just as importantly from our teams point of view it reinforces a sense that we are going places and that we are building stuff. And even in places where we have been troubled in the past we can turn things around and build stuff. And that to me is a great proposition for our people and for the building an enterprise and that’s what makes me excited right now. So thank you for your time and support and we look forward to engaging with you further.
That concludes today's call. Thank you for your participation. You can now disconnect.
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