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Text: During the call, we will discuss certain non-GAAP financial measures such as total segment operating income, adjusted EBITDA, total adjusted segment EBITDA, adjusted earnings per diluted share, adjusted net income, adjusted EBITDA margin, and free cash flow.
To ensure disclosures are consistent, these slides provide the same details as they have historically, and as I have said, are available on the investor relations section of our website.
With these formalities out of the way, I'm joined today by Steven Gunby, our president and chief executive officer; and Ajay Sabherwal, our chief financial officer.
And Mollie, for once I've got the mute off before you turned it over to me.
I obviously hope all continues to be well with each of you and all of your loved ones in these complicated times.
Ajay, in a moment, will take you through the details of the quarter.
Extraordinary efforts over the past few months to support our clients and each other from home and the major efforts over the last few years that have put us in a position such that even in these difficult times, we are seen as highly relevant resources for our clients.
So I'd like to start with that, and then with your permission, also share a couple of perspectives on the future, both the inherent near-term uncertainty these days for a number of our businesses, but also the enormous confidence that we have in the medium- and long-term prospects for all of our businesses.
So let me start with the results.
One way to look at them, a pessimistic way to look at them, is to note that our adjusted earnings per share of $1.32 is down significantly from a year ago.
Another way to look at it, however, is to note first that we happen to be cycling an all-time record quarter for adjusted EPS, so the comparison is a difficult one.
But second and more important, if you step back and think about it, in the face of COVID, in the face of some parts of our businesses being at record low levels of utilization due to travel restrictions, court closures, and other challenges arising from COVID, and in the face of a substantial amount of extra capacity that was added pre-COVID, we still managed to deliver the fifth best adjusted earnings per share ever in the history of this company and the highest revenue quarter ever.
So I am extraordinarily positive about the results and I hope you are too.
As we discussed during the last quarter's earnings calls, we expected this to be a slow quarter.
And parts of our business were, in fact, extraordinarily slow.
Obviously, a number of parts of FLC, but in truth, parts of every segment.
And yet overall, we have been able to deliver incredibly solid results.
So let me just try to describe a little bit of how that happens.
In part, it happens because the markets not only take away, they give.
Though discretionary spend on consulting services is, of course, down considerably, and as I think you know, deal flow is reduced and courts' closures meant litigation was postponed, the COVID crisis, and resulting economic turmoil created need as well.
Need for restructuring, for crisis communication, for crisis litigation support.
So some of what we are seeing is simply a major shift in client needs and spend versus simply a reduction.
So some of these results are market-driven.
To me, what is much more powerful and much more relevant to our long-term efforts to build this enterprise for our people and for you, our shareholders, is to talk about the part of the results that are not due to market forces, but rather due, in recent times to the incredible efforts by our teams to work effectively from home, together with, over the last several years, the efforts of our people to strengthen our position, to extend into new adjacencies and geographies, and to anticipate and deliver on our clients' needs.
So I'd like to try to illustrate that duality.
First fin corp, and where you obviously, see incredible second-quarter results, but also into our other businesses in econ and FLC and strat comms and tech as well.
Let me start with corp fin.
I think -- I suspect that anyone in restructuring today is busy.
And of course, most of you remember that corp fin 10 years ago in the midst of a market boom had record results.
So it's obviously easy to simply say, wow, the markets are up and so is FTI's corp fin business as well.
For me, framing this point that way misses critical, powerful points.
Points that suggest, though, obviously, we are affected by markets, we are not forks on a wave.
Over time, we determine our destiny and part of what we are seeing is the markets, but part of what we are seeing is the result of actions that our teams have taken over time, not simply the markets.
A couple of ways to see that, one way is to recall that corp fin -- our corp fin business was growing and thriving even before this market boom.
In fact, during 2018 and 2019, when the restructuring market was hovering around all-time lows, we delivered record revenues, up 17% and 28%, respectively.
That was no way we were riding, that was us lifting us.
It was the result of our teams' investments and incredible efforts that drove those results.
Equally as powerful is to not just look at how similar we are in corp fin to where we were 10 years ago, but to look at how we've changed since then, how we've enhanced our positions.
Ten years ago, during the last recession, we already had a powerful, strong corp fin business.
But we were primarily a U.S. business at that point in time.
We were in London, but we were probably No.
We didn't have a German business.
We didn't have an Asian or Australian business.
We had a smaller business in Latin America, and even in the U.S., we were primarily known as the best creditor rights business.
We did, in fact, do company side work, but we were known primarily for our middle-market company side capabilities and tended not to win the big company side cases there.
Fast-forward today, in North America, we are still the No.
1 creditor rights business.
But this year, we've already won three of the biggest company side jobs in North and South America.
If you look outside of North America, we are no longer No.
4 in London, we're now No.
We have power on the continent we didn't have 10 years ago with the addition of Andersch in Germany and the addition of other terrific professionals elsewhere in Europe.
We have the leading position in Hong Kong, a strengthened practice in Australia.
And now, a leading practice in Latin America with people on the ground in places like Mexico and Brazil.
And that's all before we talk about what we've built in corp fin that goes well beyond restructuring, our practices in OCFO, in transactions, in carve-outs, in performance improvement, in merger integration, etc.
There are waves in our business.
But what our teams have done is to take a fundamentally strong U.S. business, and rather than sit on it, they've made it fundamentally stronger, turning us into a powerful, global, multidimensional player.
Our success today reflects not just the markets, but the changes that our teams have driven and that is true for corp fin, but it's also true for our other segments as well.
I won't be as long-winded on the other segments, but let me touch on them.
In strat comms, for those of you who have been long-term shareholders, you may remember that 10 years ago when the recession hit, that business, in large part, melted down.
Not because we weren't good, but because we -- we were focused on one part, an important part, but a small part of our clients' core needs.
Today, some parts of this business are also extraordinarily slow, but critically, other parts are soaring.
With the result that if you exclude the negative impact from FX and have through revenues and look at strat comm normalized for those, our strat comm revenues are actually up for the first half of 2020.
And I don't know of any other competitor in that industry who can say that.
Similarly, if you look at econ, 10 years ago, we already had a fabulous econ business, but it was primarily a fabulous -- fabulous North American business.
Today, we still have a fabulous business in the U.S., but now, we have a fabulous business in multiple locations around the world.
And as a result, the time when litigation, investigations, and M&A transactions are down, and some have been delayed and travel is restricted, and you can't get to your clients, we have a business that even with some slow parts is overall even more in demand.
And even in FLC, where, as you can see from our results, we have had a drastic decline in revenues in a number of places due to some large jobs rolling off and the effect of the travel restrictions and the delays in litigation and investigations.
Even there, the breadth of the conversations we are having across multiple dimensions with clients remains robust, reflecting the investments our teams have made to increase the depth and the reach of our offerings, from construction to cyber to investigations to data and analytics in multiple places around the world.
So, yes, what you are seeing on the negative and the positive side is somewhat a function of markets.
Markets fluctuate up and down and those affect us.
To me, what is much more powerful and more durable is the nonmarket-driven pieces, the way our teams have invested to control our destiny, by growing core capabilities that allow us to serve the most important client needs in a wide range of circumstances.
And that to me is a more powerful and the more exciting part of the results you're seeing from this company.
Let me see if I can tie those observations about the quarter in our history to what we see going forward.
First of all, the most obvious point, but one I have to underscore is something I'm sure you all believe as well is that there is tremendous uncertainty in the world.
I don't think anyone can definitively say what the impact of COVID will be over the longer term or even in the medium term on things like bankruptcy, M&A, litigation trends, or the economy more generally, or what the specific impact looks in different paces, in Latin America, the U.S., in India, in Asia, the U.K. So I believe we have to recognize there's clearly just a lot of uncertainty in the world, particularly, in the short term.
And so therefore, you can run a lot of scenarios in terms of how our business is going to perform.
For us, you could run an incredibly negative scenario.
You could say, wow, what would happen if bankruptcies slowed down dramatically in the businesses that are slow, stays slow?
That would be a pretty negative scenario.
We don't believe that's the most likely scenario.
As Ajay will talk about, our current belief is the strong businesses are likely to stay strong.
And our businesses that have been weak so far this year are likely to see a recovery -- a gradual recovery, but a recovery.
And that's how we came to the judgment for the rest of the year that reaffirms our guidance.
But we have to underscore the concept of uncertainty here.
In these COVID days, in truth, nobody knows the depth and duration of the impact we may see.
And although we have enormous confidence in all of our businesses over any medium term, you could have a scenario where government actions cause a temporary pause on bankruptcies in some places around the world.
And of course, you can always have the random idiosyncratic factors, like, you lose some big jobs instead of winning them.
So please recognize, although we are reaffirming guidance, we also are and need to underscore just how uncertain the world is now.
Let me, therefore, instead talk to what I believe is more important, which is where based on the efforts our team have made and are making, we can drive this business in the medium and longer term.
Because over the medium and longer term, I believe markets matter but more at the core.
We control our destiny.
As we just talked about my experience and I believe our results have shown that if you do the right things over a medium-term period, even though quarters can fluctuate and market conditions fluctuate, through the fluctuations, you build the business.
So we focus a lot on making sure we're thinking hard about what the right things are.
So let me describe a few of them we talk about.
First of all, not most critically, but importantly, focusing on knowing the difference between a bad business and a good business that happens to be hurt by some temporary factors, exogenous factors.
We can't mix that up.
We can't take a good business like our FLC business or our EFC business and overreact to temporary exogenous factors.
Second, it's about being willing to support those good businesses during slow times, and indeed, invest in them even in slow quarters.
In fact, in general, in some slow quarters, it's especially important to be willing to invest in talent because it's oftentimes the case that precisely in slow quarters, the most great talent is available.
And to think about our history here, as we've talked about a few times, some of the most important outside hires we've done have been during slow times in our business.
We got terrific cyber capabilities during a period where FLC was slow.
We acquired CDG, which augmented our company side capabilities in the U.S. at a time when corp fin was slow.
And as you may have noticed, we just closed the deal with Delta Partners, which is in the non-restructuring part of CF at a period when the non-restructuring part of CF is not booming.
We made each of those investments because we could find great talent.
Talent that we thought would collaborate terrifically with the rest of our firm at those point in time.
Talent we had confidence in, and it has proven, at least so far in the first two cases, that if you get great talent whenever it is available, over any medium term, it pays for itself, even if at that point in time that business is slow.
Our core belief, therefore, is, notwithstanding fluctuations in earnings.
We always need to be focused on attracting, developing, and betting behind terrific talent, whether it is recruited or it's homegrown.
My experience is that if one does that, if we continue to do that, we will continue to do the essence of building a professional services firm.
Build great businesses, extend those businesses into new adjacencies, extend our core positions to new places, grow our brand, attract, grow, and retain, and develop great people.
And as a result, be more relevant for your clients and take market share.
And thereby, you build a firm and make sure people proud to be there and attracts other great people.
And through that, ultimately, but also powerfully, delivers for you, our shareholders.
That is the path we have been on these past few years, and I believe in the face of COVID, it is even more important path to commit to stay on going forward.
So with that, let me turn this over to Ajay to take you through the quarter in more detail.
Beginning with the second-quarter results.
As Steve said, we reported record quarterly revenues and our results were better than we anticipated at the time of our last earnings call.
Considering the impact of the COVID-19 pandemic on us, our clients, and our employees, we are very grateful for these results.
Revenues of $607.9 million were up $1.7 million or 0.3%, compared to revenues of $606.1 million in the prior-year quarter.
As expected, our revenue growth year over year was driven by record quarterly performance in our corporate finance & restructuring segment because of the surge in demand for our restructuring services.
GAAP earnings per share of $1.27 in 2Q '20, compared to earnings per share of $1.69 in 2Q '19.
Adjusted earnings per share for the quarter were $1.32, which compared to $1.73 in the prior-year quarter.
The difference between our GAAP and adjusted earnings per share in 2Q '20 reflects $2.3 million of non-cash interest expense related to our convertible notes, which decreased GAAP earnings per share by $0.05.
Our convertible notes had a potential dilutive impact on earnings per share of approximately 507,000 shares and weighted average shares outstanding for the quarter as our average share price of $121.03 this past quarter was above the $101.38 conversion threshold price at maturity.
Worth noting, the trigger for conversion of our convertible notes prior to maturity was not met during the quarter.
Second-quarter 2020 net income of $48.2 million, compared to net income of $64.6 million in the prior-year quarter.
The year-over-year decrease was largely due to higher compensation, which was primarily related to an 18.2% increase in billable headcount and higher variable compensation, which was partially offset by a decline in SG&A expenses and a lower tax rate.
SG&A expenses for 2Q '20 of $126.9 million were 20.9% of revenues.
This compares to SG&A of $129.9 million or 21.4% of revenues in the second quarter of 2019.
The decrease was primarily due to lower travel and entertainment expenses resulting from COVID-19-related travel restrictions, which was partially offset by an increase in bad debt.
Second-quarter 2020 adjusted EBITDA of $75.8 million or 12.5% of revenues, compared to $97.2 million or 16% of revenues in the prior-year quarter.
Our effective tax rate for the second quarter of 23.1%, compared to 24.8% in the prior-year quarter.
The 1.7% decline was primarily due to a favorable discrete tax adjustment related to share-based compensation.
For the balance of 2020, we expect our effective tax rate to range between 25% and 27%.
Billable headcount increased by 715 professionals or 18.2%, compared to the prior-year quarter.
Sequentially, billable headcount was up by 65 professionals or 1.4%.
Worth noting, during the quarter, 66 professionals focused on performance analytics, permanently transferred from our forensic and litigation consulting segment to our business transformation and transactions practice within our corporate finance & restructuring segment.
Now, I will share some insights at the segment level.
In corporate finance & restructuring, record revenues of $246 million increased 29.5%, compared to the prior-year quarter.
This terrific growth occurred despite a decline in success fees relative to the extraordinary success fees in the prior-year quarter and lower business transformation and transaction services revenues.
Higher demand and realization for our restructuring services, which includes revenues related to our acquisition of Andersch AG in August of 2019, resulted in the significant increase in segment revenues.
Worth noting, during the quarter, we were engaged in some of the largest company and creditor-side restructuring mandates, particularly, in the retail and consumer, energy, automotive, airline, telecom, and financial services sectors.
Adjusted segment EBITDA of $76.3 million or 31% of segment revenues, compared to $50.5 million or 26.6% of segment revenues in the prior-year quarter as increased revenues more than offset higher compensation related to the 34.7% increase in billable headcount and higher variable compensation.
On a sequential basis, corporate finance & restructuring revenues increased $38.3 million or 18.4% as growth in our restructuring practice was partially offset by a decline in demand for our business transformation and transaction services.
Revenues of $106.4 million decreased 27.1%, compared to the prior-year quarter.
The decrease in revenues was primarily driven by lower demand for investigations and dispute services, in part because certain matters were at least deferred due to travel restrictions to client locations, court closures and delays.
Adjusted segment EBITDA was a loss of $9 million, which compared to adjusted segment EBITDA of $28.2 million or 19.4% of segment revenues in the prior-year quarter.
The year-over-year decrease in adjusted segment EBITDA was due to lower revenues with lower staff utilization and higher compensation related -- primarily related to a 9.4% increase in billable headcount, which was only partially offset by a decline in SG&A expenses.
Sequentially, FLC revenues decreased $41.2 million or 27.9% as we experienced lower demand for our investigations, disputes, and data and analytics services.
In addition to the COVID-19-related impacts that I previously mentioned as negatively impacting revenues, a few large investigations ended during the second quarter.
Our economic consulting segment's revenues of $151.5 million decreased 2.6%, compared to the prior-year quarter.
Despite the impacts of COVID-19, we were able to continue work on large M&A-related antitrust engagements and achieved higher realization.
This increased demand for M&A-related antitrust services was more than offset by lower demand for financial economics and non-M&A-related antitrust services, as well as, lower realization for non-M&A-related antitrust and international arbitration services, compared to the prior-year quarter.
Adjusted segment EBITDA of $21.7 million or 14.3% of segment revenues, compared to $23.3 million or 15% of segment revenues in the prior-year quarter.
The year-over-year decrease in adjusted segment EBITDA was due to lower revenues, as well as, higher SG&A expenses, primarily related to an increase in bad debt, which was partially offset by lower variable compensation.
Sequentially, economic consulting's revenues increased $19.4 million or 14.6% due to increased realization and demand for our M&A-related antitrust services.
In technology, revenues of $47.1 million decreased 15.4%, compared to the prior-year quarter.
The decrease in revenues was primarily due to lower demand for litigation and global cross-border investigation services, in part arising from COVID-19-related delays of investigations and travel restrictions, as well as, lower revenues related to the completion of our transition services associated with the September 2018 Ringtail divestiture.
Adjusted segment EBITDA of $6.4 million or 13.7% of segment revenues, compared to $12.9 million or 23.1% of segment revenues in the prior-year quarter.
The decrease in adjusted segment EBITDA was due to lower revenues and higher compensation, primarily related to a 19.5% increase in billable headcount.
On a sequential basis, technology revenues decreased $11.6 million or 19.8% because of decreased demand for global cross-border investigations and M&A-related services.
Revenues in the strategic communications segment of $56.9 million decreased 3.8%, compared to the prior-year quarter.
Excluding the impact of FX, the decrease in revenues was primarily due to a $1.9 million decline in pass-through revenues, which include billable travel and entertainment expenses, client event costs, and media buys.
The decrease in revenues was partially offset by higher demand for public affairs and financial communications services.
Adjusted segment EBITDA of $10 million or 17.6% of segment revenues, compared to $10.5 million or 17.7% of segment revenues in the prior-year quarter.
The decrease in adjusted segment EBITDA was due to higher compensation, primarily related to a 13.2% increase in billable headcount, which was partially offset by a decline in SG&A expenses.
Sequentially, strategic communications revenues decreased $1.5 million or 2.6%, primarily due to a decline in pass-through revenues, which was largely offset by higher demand for services provided to clients managing through urgent communication projects related to restructuring and financial issues.
Let me now discuss key cash flow and balance sheet items.
We generated net cash from operating activities of $153 million and free cash flow of $147.3 million in the quarter.
Total debt, net of cash, decreased $100.1 million year over year from $147.1 million at June 30, 2019, to $47 million at June 30, 2020.
During the quarter, we repurchased 470,853 shares at an average price per share of $108.41 for a total cost of $51 million.
In the last 12 months, ended June 30, 2020, we have repurchased 1.27 million shares at an average price per share of $107.78 for a total cost of $137.1 million.
On July 28, 2020, our board of directors authorized an additional $200 million for share repurchases.
As of July 28, 2020, we have re -- we have purchased 8.2 million shares pursuant to the repurchase program at an average price per share of $54.90 for an aggregate cost of approximately $450.4 million.
We have approximately $249.5 million remaining available for share repurchases under the program.
Turning to our guidance.
In several prior quarterly calls, we have shared with you that a small change in revenue for us can have an outsized impact on earnings per share because of the relatively fixed cost nature of our business and associated margins.
This cuts both ways as was abundantly evident this quarter in a positive way for our corporate finance segment and a negative way for our FLC segment.
Our decision to reaffirm guidance for the year, even in this very uncertain time, is based not only on our results to date, but also on several assumptions about the balance of the year.
First, we expect elevated demand for our restructuring services at least for the balance of this year, driven by strong demand in several verticals, including oil and gas exploration, production and drilling, automotive, department stores, financials, telecommunication services, healthcare, airlines, restaurants, and entertainment, and entertainment venues.
Second, our guidance assumes an improvement, though very gradual, in utilization for many of our practices across several segments, but in particular, for our FLC segment.
We are starting to see virtual depositions and arbitrations being rescheduled and some paused on-site client work starting to resume.
I caution, though, that this situation is fluid as the majority of our client premises are still not open.
We are restricting travel for our employees even where airlines are operating or where cross-border travel is allowed.
Business development is hampered by not being in-person and backups in court proceedings may push certain work into next year.
Third, we believe this pandemic will continue to result in a new genre of disputes, investigations, and conflicts that our experts are well-positioned to assist with and support.
Our expertise is needed as distressed transactions, crisis communications, litigations related to material adverse effect clauses, disputes related to business interruption, and investigations arising from improprieties grow.
Fourth, with business travel all but stopped, there is an associated drop in billable and non-billable travel and entertainment expenditures.
Fifth, our guidance is for a finite period, the next two quarters.
And we typically have lower utilization in the fourth quarter as many of our professionals may take time off for the holidays in the fourth quarter.
This year, in particular, this impact maybe even more pronounced than usual.
Before I close, I want to reiterate a few key themes that underscore the strength and potential of our business.
The relative strength and stability of our collective grouping of businesses shined through this quarter.
Despite a global pandemic, we reported record revenues and reaffirmed guidance.
We continue to attract talent because our colleagues are working on the highest profile engagements in their fields across the globe and we believe our investments in talent with higher utilization will drive profitability.
As Steve mentioned, over the years, we have both deepened our core capabilities, for example, in EMEA, Asia, and Australia in corporate finance and expanded into adjacencies, such as non-M&A-related antitrust, business transformation, cybersecurity, and public affairs.
We continue to believe that these areas will come out strong as we emerge on the other side of this pandemic.
Our business generates tremendous free cash flow as evidenced by the $100.1 million reduction in net debt over the last 12 months despite us repurchasing $137.1 million worth of our shares over the same time frame and making a well-timed acquisition of a leading restructuring business in Germany.
On top of this, our balance sheet strength gives us the flexibility to continue to create shareholder value in numerous ways.
Worth noting, following the close of the second quarter, on July 1st, 2020, we closed the acquisition of Delta Partners.
We believe this acquisition, along with our already very strong position in the technology, media, and telecom vertical, makes us one of the preeminent TMT-focused consulting practices in the world.
And today, we announced a $200 million increase to our share repurchase authorization.

user
compname reports q2 earnings per share $1.27.
q2 earnings per share $1.27.
q2 revenue $607.9 million versus refinitiv ibes estimate of $563.9 million.
q2 adjusted earnings per share $1.32 excluding items.

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