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Text: A copy of which is available on our website at www.
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've 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.
Mollie, can you hear me?
Let me say I hope everything is well with each of you and that you and your families are healthy and safe.
Obviously, we all know this is an incredibly difficult time for many of us individually, the economy and in fact, for the world as a whole.
And it's an emotional time for many people too.
Unfortunately, this sort of call is not the sort of back and forth conversation that allows me to check in with each of you personally, but let me just say again, I do hope everything is well with each of you and the people you care deeply about.
In a minute, Ajay will share you the specifics of our first quarter.
Let me, if I may, upfront, make three points that I think might be of interest to you.
The first one is to let you know that I believe our team globally is doing a fabulous job, not a perfect job because in this environment, nobody does a perfect job, but a fabulous job of juggling, of adjusting, of modifying in ways so that we can weather this storm and help our clients weather this storm.
The second that I'd like to emphasize that there are both puts and takes with respect to the impact of COVID on different parts of our business.
There are some places where clients have desperate, urgent needs for immediate help from us, the same time there are places that have been negatively affected of slowdown and probably will be slow for a while.
The third point, I believe, is the most important which is that even though there will be puts and takes, none of the puts or takes, in my view, takes away from the underlying strength of this firm, the terrific long-term trajectory we've been on, an incredible trajectory, I believe, over any extended period of time we can stay on.
So let me take those three points in turn.
In terms of the first point, our key -- I'm sure, many of you have had to and are working through a whole line of issues during this period.
95% of our people around the world right now are working from home.
In some places around the world, people were working from offices, then the offices close, then they work from home, then they went back to the offices and now they're back working from home.
For the people working from home, like I'm sure for many of you, it's a challenge.
We have to try to collaborate with clients, with each other, and our teams, to drive critical work product, sometimes with tight deadlines with a level and duration of separation that probably none of us have ever had to face before.
And in many places, people are doing that while juggling kids, who are home from school or taking care of sick relatives that live with them or nearby.
And of course, everyone is dealing with stress and worries, worries about themselves, their families, their loved ones.
I want to communicate that in the face of all that challenge and disruption, I believe our people are doing a fabulous job of supporting our clients, supporting each other, and keeping our business moving ahead.
I can't give multi examples, but a few.
On one assignment, our real estate group worked 23 consecutive days to meet an aggressive deadline to help key players in a mortgage REIT industry avoid liquidation.
In Tech, our teams over the last few weeks worked in many cases around the clock with clients to find a way to do secure review of legal documents not in review centers but in home.
Our teams have implemented new processes for digital forensics to collect and analyze data remotely versus having to go into a company, for example, to crack hard drives and other devices.
And many in our firm have figured out ways to collaborate across FTI as well as with external parties like law firms to do podcast, webinars and other thought leadership to engage our clients on the wide array of challenges now and the future that are being created by COVID-19.
In many places, our people have accelerated training, whether it's educating our teams or clients on new legislation like CARES or cross-training to equip folks with the capacity to support areas in which demand is surging.
And then finally, like many of you, we've had people -- I'll just say incredibly creative, way more fun than I am but -- and it's just, it's a delight to see internal connection activities, maintaining morale, promoting the spirit and level of collaboration necessary to succeed.
Lots of people leaning in.
And that's resulting in us maintaining effectiveness and connection during this trying period.
I hope that gives you a sense, at least, of what our teams are doing to keep this company vibrant, to make us most effective in helping clients.
Though in many cases have deep needs right now, whether their storm, while also making sure we're engaged with clients who don't currently have work that are going to have needs down the road and position ourselves to best meet those needs.
But the result of those activities, I believe, our company is weathering this storm about as well as anybody possibly can.
Having said that, second point I want to underscore is that not all of our parts -- not all parts of our firm are currently firing on all cylinders.
Now some are, some parts of our business, for example, are advising clients who are facing near-term financial crises or liquidity issues or reputational issues.
Around that sort of work, there's an enormous sense of urgency as you might expect.
And that is creating the need, in some cases, for our people to work incredibly long hours to deliver for our clients.
And we are getting called on for substantial amount of important work like that.
On the other hand, one only has to talk to a few law firms to know that there has been recently a significant slowdown on a fair amount of litigation, for our professionals are experts to testify in court and provide courtroom graphics.
The fact that the courts are closed in many jurisdictions and litigation is being postponed is a very real effect.
And it's not just litigation that's being affected by COVID right now.
All of our businesses, Corp Fin, FLC, Econ, Tech, Strat Coms have service offerings that are focused on supporting major transactions with M&A activity plummeting this quarter and continued economic and political uncertainty out there, those parts of our business have been affected and will likely be affected for some time.
So though we have businesses that are incredibly busy, we clearly have seen negative effects of COVID-19 as well.
We saw some significant slowdown since some of our businesses tied to litigation and transactions toward the end of the first quarter.
Not so much throughout the quarter, but toward the end.
And we expect those slowdowns to extend into the second quarter at least, and maybe, maybe beyond.
I do want to stress what I believe is the key point however and maybe the most important point which is even if we have slowdown in parts of our business, it does not make those parts of our businesses bad businesses or unattractive when one thinks about any medium-term time frame.
And just to make an -- to give an example.
I think it's the strongest international arbitration practice in the world.
That business has had a very slow first quarter which is reflected in some of the economic results which Ajay will talk about, and we're expecting quite a slow quarter in the second quarter as well.
That pause in activity doesn't mean that the need for international arbitration services is going away more permanently, nor does it mean that the leading positions that we have around the globe where the caliber of our people has changed because of COVID-19.
Our people didn't get stupid overnight.
It just means we are currently having weaker results than we would normally expect from that business, and they, for a while.
And the same is true for a number of our other litigation and transaction-oriented businesses.
Important, longer term, we do not expect litigation or M&A or capital markets activity to be permanently depressed.
Our experience with respect to litigation, in fact, is to the contrary which is that this sort of crises, ultimately triggers a huge amount of incremental litigation.
So though we expect some of these businesses to be affected, impacted in the near term, we have no less confidence in the strength of our positions in those businesses or the ultimate demand for our services in the medium and long term.
That leads me to the third point, the final point which is that though there are puts and takes, I do not believe that this pandemic takes away, in any way, from the underlying strength of this firm, the power of the trajectory that we have been on and our ability to stay on that trajectory over any medium or long term.
As we talked about a lot on these calls and elsewhere, one never can build a great professional services firm by focusing on quarters anyway.
In fact, an individual quarter results is often not a good indication of the long-term trajectory the company is on.
A great professional services firm is created by having teams of great people who develop and deliver on key propositions, on topics of critical importance to clients.
None of that's created over a quarter nor does it get lost over a quarter.
We have been, over the last several years, building those capabilities in good quarters and bad quarters, and it is that focus that has allowed the last five years of this company's history to be by far the best years, five years ever.
Whether this year we had great quarters or not great quarters, we will continue to build this enterprise.
We will not sacrifice building this business in any way just to make individual quarters look better.
In fact, as we have in the past, if great talent becomes available, this year, even in businesses that happen to be slow in that quarter, and we believe it will help us build the business for future, we will take advantage of that -- those opportunities, the potential disruptions in talent market even if it further dampens a potentially slow quarter.
The reason we do this, we intend to do this, it's not only because it's the right way to build a great professional services firm for our people and to create value for shareholders over any extended period of time, it's also because we can.
This company has never been as strong as we are today in terms of our client relationships, the breadth of our offerings, the capabilities of our people, the relevance of our brand, the companies that are challenged or in terms of financial strength and balance sheet.
So yes, we may, this year, have some puts and takes.
I do want to underscore the depth of my belief in the power of this company, the terrific job our people have been doing and are doing and the confidence that leaves me with about our ability not only to weather the storm, but diverge from COVID-19 on at least as good a trajectory as we entered this period.
With that, let me turn this over to Ajay to give you more details on the quarter.
As part of the guidance discussion, I will share our current expectations on how the global COVID-19 pandemic may impact our business.
So beginning with the first-quarter results.
Revenues of $604.6 million were up $53.3 million or 9.7% compared to revenues of $551.3 million in the prior-year quarter.
Worth noting, while revenues in EMEA and North America increased 22.8% and 8.1% respectively in the quarter, revenues in Asia Pacific which represented 6.6% of our overall revenues in 2019, declined 14.8%.
The decline in Asia Pacific was primarily due to COVID-19 related disruptions and associated restrictions which resulted in delayed or postponed client engagements.
GAAP earnings per share was $1.49 compared to $1.64 in the prior-year quarter.
GAAP earnings per share included $2.2 million of noncash interest expense related to our convertible notes which decreased earnings per share by $0.04.
First-quarter adjusted earnings per share of $1.53 which excludes the noncash interest expense, compared to $1.63 in the prior-year quarter.
Our convertible notes had a potential dilutive impact on earnings per share of approximately 433,000 shares and weighted average shares outstanding for the quarter.
As our share price on average of $117.71 this past quarter was above $101.38 conversion threshold.
Worth noting, the trigger for conversion of our convertible notes prior to maturity was not met during the quarter.
Net income of $56.7 million compared to $62.6 million in the prior-year quarter.
The year-over-year decrease in net income was primarily because the 9.7% growth in revenues did not adequately offset increased compensation expense related to the 18 and a half percent increase in head count, higher variable compensation and an increase in SG&A expenses.
SG&A of $127 million was 21% of revenues.
This compares to SG&A of $113.2 million or 20.5% of revenues in the first quarter of 2019.
An increase SG&A year over year was primarily related to nonbillable headcount growth, with salary and benefits increases as well as higher real estate and IT expenses.
First quarter of 2020 adjusted EBITDA of $83.2 million compared to $96.1 million in the prior-year quarter.
Our adjusted EBITDA margin of 13.8% compared to 17.4% in the first quarter of 2019.
Our first-quarter 2020 effective tax rate of 22 and a half percent compared to 24.1% in the first quarter of 2019.
expenses and a favorable adjustment to the valuation allowance on certain deferred tax assets.
For the balance of 2020, we now expect our effective tax rate to range between 25% and 27%.
Worth noting, Q1 of 2020 GAAP and adjusted earnings per share were positively impacted by FX remeasurement gains primarily due to the strengthening of the U.S. dollar and the euro in the quarter as compared to the British pound.
This benefited our first quarter of 2020 adjusted earnings per share by $0.07.
Billable headcount at the end of the quarter increased by 716 professionals or 18 and a half percent compared to the prior-year quarter.
The increase is due to growth across all business segments.
Sequentially, billable headcount increased by 156 professionals or 3.5% again with every business segment growing.
Now, I will share some insights at the segment level.
In Corporate Finance & Restructuring, revenues increased 29.1% to $207.7 million compared to the prior-year quarter.
The increase in revenues was due to higher demand for restructuring services in North America and EMEA which included revenue contributions from our August 2019 acquisition in Germany and increased demand for our business transformation and transaction services in North America.
From an industry perspective, during the quarter, we experienced particularly strong demand in the TMT and energy verticals.
Adjusted segment EBITDA of 48.9% or 23.6% of segment revenues compared to $37.4 million or 23.2% of segment revenues in the prior-year quarter.
Sequentially, revenues increased 14.7% driven by higher demand for both our business transformation and transactions and restructuring services in North America and EMEA.
Turning to forensic and litigation consulting.
Revenues increased 6.2% to $147.6 million compared to the prior-year quarter.
The increase in revenues was driven by higher demand for our data and analytics services as well as increased demand for our disputes and construction solution services in EMEA and North America.
Adjusted segment EBITDA of $21.2 million or 14.4% of segment revenues compared to $31.8 million or 22.9% of segment revenues in the prior-year quarter.
Sequentially, revenues decreased 1.8% primarily due to engagements being delayed by both court closures and travel restrictions resulting from the COVID-19 outbreak, particularly in Asia.
Our economic consulting segment reported revenues of $132.1 million which declined 7.1% compared to the prior-year quarter.
The decrease in revenues was largely due to the lower demand for financial economics and non M&A-related antitrust services as well as lower realized rates for international arbitration services which was partially offset by a higher demand for M&A-related antitrust services.
Adjusted segment EBITDA of $12.7 million or 9.6% of segment revenues compared to $24 million or 16.9% of segment revenues in the prior-year quarter.
Sequentially, revenues decreased 13.7% primarily driven by lower demand and realization for our international arbitration services due to arbitration hearings being postponed in light of the COVID-19 pandemic and lower demand for our financial economic services driven by large engagements that were rolling off.
In technology, revenues increased 14.4% and to $58.7 million compared to the prior quarter.
The increase in revenues was primarily due to higher demand for M&A-related and global cross-border investigation services.
Adjusted segment EBITDA of $14.5 million or 24.7% of segment revenues compared to $12.7 million or 24.8% of segment revenues in the prior-year quarter.
Sequentially, revenues increased 14%.
The increase in revenues was driven by higher demand for M&A-related and litigation services in EMEA and North America.
Strategic communications revenues increased 1.2% to $58.4 million compared to the prior-year quarter.
The increase in revenues was due to higher demand for public affairs services.
Adjusted segment EBITDA of $8.8 million or 15% of segment revenues compared to $11.5 million or 20% of segment revenues in the prior-year quarter.
Sequentially, revenues decreased 12% primarily due to a $4.4 million decline in pass-through revenues and lower project-based revenues in EMEA and Asia.
Let me now discuss a few cash flow -- a few key cash flow and balance sheet items.
As is typical, we pay the bulk of our bonuses in the first quarter.
So net cash used in operating activities of $123.6 million this quarter compared to $102.1 million used in operating activities in the prior-year quarter.
The year-over-year increase in use of cash was primarily due to higher annual bonus payments reflecting our record 2019 financial performance and higher salaries related to the increase in headcount which was partially offset by an increase in cash collected resulting from higher revenues.
During the quarter, we spent approximately $50.3 million to repurchase 450,198 shares of our common stock at an average price of $111.73 per share.
As of the end of the quarter, approximately $116 million remained available for stock repurchases under our $500 million stock repurchase authorization.
Total debt, net of cash, of $143.2 million at March 31, 2020, compared to $137 million at March 31, 2019, and a negative $53.1 million at December 31, 2019.
The sequential increase in total debt net of cash was primarily due to cash used in operating activities resulting from bonus payments as well as an increase in share repurchases.
I am sure you are all more interested in what impact the global pandemic may have on our ensuing quarters and result in guidance for 2020 than in our Q1 results.
The pandemic is certainly affecting our business segments, though in different ways.
For our restructuring practice and to a lesser degree, currently, for crisis-driven disputes and communication services, it is resulting in a significant tailwind.
For other parts of our business, there is at least a deferral of work, if not, a reduction in demand.
It is uncertain how long we will have to proceed with shelter-in-place and similar orders and how deep the impact will be on the overall business environment.
We have ran several scenarios shaped by our current expectations.
I will now take you through these expectations.
We expect M&A transactions to be deferred and possibly canceled and litigation to be postponed or possibly settled, causing revenues from some of our service offerings in our FLC, economic consulting and technology segments to decrease in the near term.
As Steve mentioned, our practitioners are doing a remarkable job serving our clients from home offices.
However, certain essential aspects of what we do are difficult to do from home which may impact revenue adversely.
Some examples of the delays or pauses that we are experiencing include: in-court expert witness testimony has been delayed due to court closures in many countries; monitorships in certain jurisdictions, where our teams must be physically on-site to perform their analyses, are unable to continue; and there are moratoriums on certain regulatory or other proceedings, such as a 6-month moratorium in certain insolvent trading rules for directors in Australia which means that many companies that would otherwise have filed for insolvency have stayed in business.
We also expect travel restrictions to hinder in-person business development.
Conversely, also worth noting, that business travel all but stopped.
There is an associated drop in billable and nonbillable travel and entertainment expenditures.
Resulting from these expectations, our outlook in Q2, and perhaps even into Q3, is that the increased demand for our restructuring services may not adequately offset the negative impact on several of our other businesses.
Our second quarter earnings per share could be well below the level we reported in Q1.
Though we are currently expecting some weakness in the second quarter, we are not currently expecting that weakness to persist for the entire year for four reasons.
First, the wave of distress and ensuing default continues to grow and will likely continue even beyond the time frame when work that has been paused or deferred resumes.
Already, we are seeing increased demand for our restructuring services in several verticals including retail, energy, mortgage REITs, healthcare, airlines, gymnasiums, restaurants, entertainment and entertainment revenues which may further accelerate.
Second, our restructuring practice is also able to draw on resources from other areas within our Corporate Finance segment and possibly, to a lesser extent, from other segments to service these engagements.
Third, though courts may not get fully back to normal, we are anticipating that the current constraints and travel restrictions will not persist at this level.
And fourth, our expertise is needed as distressed transactions, crisis communications, litigation-related to material adverse effect clauses, disputes related to business interruption and investigations arising from improprieties in the face of this pandemic grow.
After running several scenarios based on the above expectations, while there is an increased range of uncertainty and outcomes, for the full-year 2020, we do not see a basis for changing our guidance range at this time.
We will evaluate our guidance again after the second quarter when we will have better information regarding how adversely our business as a whole may be impacted and how much of such decline is offset by the increased demand for restructuring and other services.
Before I close, I want to reiterate a few key themes that underscore the strength and potential of our business.
We have significantly diversified our offerings over the last several years with investments in areas such as non M&A-related antitrust, international arbitration, business transformation, cybersecurity and public affairs.
While some of these adjacencies may be depressed in the short term, we believe that these areas will come out strong as we emerge on the other side of this pandemic.
Our balance sheet strength gives us the flexibility to allocate capital and create shareholder value in numerous ways, particularly, we are able to attract and retain the world's leading experts in their respective fields.
At our core, we help our clients especially in times of dislocation as they navigate their most complex business challenges.
As Steve mentioned, this pandemic will undoubtedly result in a new genre of disputes, investigations and conflicts that our experts are well-positioned to assist with and support.
Lastly, we have a world renowned restructuring practice.
And now, even more than in the recent past, our restructuring services are in great demand.

user
q1 earnings per share $1.49.
q1 revenue $604.6 million versus refinitiv ibes estimate of $603.3 million.
q1 adjusted earnings per share $1.53 excluding items.
toward end of quarter, we began to see effects of covid-19 materialize.

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