Welcome to the FTI Consulting Third Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note that the event is being recorded. I would now like to turn the conference over to Mollie Hawkes, Vice President of Investor Relations. Please go ahead.

Good morning. Welcome to the FTI Consulting conference call to discuss the company's third quarter of 2020 earnings results as reported this morning. Management will begin with formal remarks, after which they will take your questions. Before we begin, I would like to remind everyone that this conference call may include forward-looking statements within the meaning of Section 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, share repurchases, business trends, and other information or other matters that are not historical, including statements regarding estimates of our future results, 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 the earnings press release issued this morning, a copy of which is available on our Web site at www.fticonsulting.com, as well as other disclosures under the heading of risk factors and forward-looking information in our annual report on Form 10-K for the year ended December 31, 2019, and updated in our quarterly report for the first quarter ended March 31, 2020, as well as in our other filings with the SEC. Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this earnings call and will not be updated. 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. For a discussion of these and other non-GAAP financial measures, as well as our reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures, investors should review the press release and accompanying financial tables that we issued this morning, which include the reconciliations. Lastly, there are two items that have been posted to the Investor Relations section of our Web site this morning for your reference. These include a quarterly earnings presentation and an Excel and PDF of our historical financial and operating data, which has been updated to include our third quarter of 2020 results. Of note, during today's prepared remarks, management will not speak directly to the quarterly earnings presentation posted to the Investor Relations section of our Web site. To ensure our 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 Web site. 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. At this time, I will turn the call over to our President and Chief Executive Officer, Steve Gunby.

Thank you, Mollie. Good morning to everyone and thank you all for joining us. Well, I'm sure you've all noticed that it's the end of October and COVID is still with us. And I'm guessing that's just as troubling for you and as it is for me. I think most of us knew during the summer that the evidence suggested there would be a good chance that COVID would still be with us at this point. I don't think any of us really expected that it would be completely gone, but I guess most of us secretly hoped it would and at least had some expectations it would be better than it is today. So in addition to hoping that you are doing well and your loved ones as well, let me thank you during these complicated times for the continued attention you're showing our company. Let me also use this opportunity to thank some of the FTI folks who may be joining this call for the incredible efforts that have continued all year and continued into this quarter. Our company, as I'll talk about in a moment, we're in terrific shape. We're not in perfect shape. There's no company during COVID is in perfect shape, but we are in terrific shape. And that has only been possible because of the extraordinary efforts by our people, efforts to support clients, to support each other from home, efforts that collectively have put us in a strong position not only to weather COVID, but in my view to soar coming out of this. Today, as usual, I will let Ajay take you through the details of the quarter, but let me upfront share a couple of comments; one on the revision to guidance and secondly, and at least as important, why I…

Thank you, Steve. Good morning, everybody. In my prepared remarks this morning, I will review our companywide and segment results and discuss our revised guidance for the year. I'm pleased to report strong third quarter results. Most notably, our Forensic and Litigation Consulting, or FLC segment, delivered strong sequential improvement even with significant opportunity remaining for increased utilization. Conversely, in our Corporate Finance and the Restructuring segment, bankruptcies ebbed, perhaps in part due to government stimulus benefiting certain industries, which in turn had us reporting revenue in that segment at less than the level reached in the second quarter of 2020. Underscoring our market-leading positions and resiliency, even in the face of a global pandemic, this quarter's revenue of $622.2 million was a record high. Both billable headcount of 5,019 and year-over-year billable headcount growth of 15.8% were also records giving us ample capacity for future growth and profits. Let me now take you through the details. For the quarter, revenues of $622.2 million were up $29.1 million or 4.9% compared to revenues of $593.1 million in the prior-year quarter. Our revenue growth year-over-year was driven by higher demand in our Corporate Finance and Restructuring and Economic Consulting segments, which was partly offset by lower demand in our FLC and Strategic Communications segments and a decline in pass-through revenue as compared to the prior-year quarter. GAAP EPS of $1.35 in 3Q '20 compared to $1.59 in the prior-year quarter. Adjusted EPS of $1.54 compared to $1.63 in the prior-year quarter. The difference between our GAAP and adjusted EPS in the quarter reflects a $7.1 million special charge, which reduced GAAP EPS by $0.14 and $2.3 million of non-cash interest expense related to our convertible notes, which decreased GAAP EPS by $0.05. The special charge is comprised of two items. First,…

We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Andrew Nicholas with William Blair. Please go ahead.

Hi. Good morning.

Good morning, Andrew.

Just wanted to start digging into CFR a little bit further. Can you help us better understand the utilization trend there? I recognize that demand was a little bit lighter than you had anticipated with the slowdown in bankruptcy but just surprising to see it down so much sequentially. So I'm just kind of wondering what the drivers are there. How much of that is a function of weakness in business transformation, or is it a function of elevated hiring in anticipation of demand in 2021? Just anything else that you can kind of say specifically to utilization in the quarter.

Andrew, the latter is the more pertinent factor. We've hired lots and lots of people and especially from, for example, the universities. And utilization is not a weighted metric. It's not weighted by seniority. It's not weighted by partner or junior. Each person has the same number of billable hours and utilization. So that's the most significant factor. It's not as if our demand has completely fallen off. Year-over-year, restructuring is up. And sequentially, our business transformation and transactions are also up. Sequentially and even year-over-year, transformation is also helped by the acquisition we did by – of Delta Partners. So we are here maintaining market share. There is a lot of bankruptcy out there. There's a lot of dislocation out there. Business transformation is getting better. We've just hired – at this time, universities is when you hire and we – this gives us lots of capacity to grow.

Makes sense. Thank you. And then we started to see quite a bit more positive commentary around M&A in the market of late. Just wondering if that's something that you've seen as well? What businesses you'd expect to be most positively impacted by that in the near term and your outlook on that front?

No question about it. That was to some the surprise of the pandemic, how quickly M&A came back. So you're seeing that in our technology practice, for example, with – we do particularly well on large M&A, so the mega $5 billion plus deal. And there's been a lot of those announced publicly. And we also get hired in advance to assess the antitrust issues, for example, that may or may not be there on the Economic Consulting side. So to your specific question, Economic Consulting and Technology are the two segments that benefit directly from M&A – for the most part, from large M&A, and you're seeing that in the results. Quite evidently, you're seeing that in the results of both segments. Our Corporate Finance area also on the business transformation and transaction side, the transaction elements of that, which is about 15% odd of our total revenue in that area in the whole segment, they too are seeing a lot of activity from private equity clients. That's why I specifically mentioned that. So those are the three areas.

Great. That's helpful. And then if I could just ask one more. I just want to be clear on kind of the FLC trajectory going forward. I think you had mentioned at the outset of the prepared remarks that your initial expectation was more of a hockey stick. Is that something that's now moved more towards 2021 in a similar shape or is it just an expectation now that that rebound is more gradual, not that hockey stick kind of being pushed out to next year?

Maybe I'll take that. I think our expectation is – look, you don't know, right? This is so affected by the trajectory of COVID and government innovations to do cases virtually and all that. But I would say it is not that we just pushed out a hockey stick. It is more, at least currently for a gradual recovery. We're finding ways to get around the court restrictions. Courts are starting to innovate, but I think that team's expectations of a quick rebound that they had back in July, I think are more muted. I do want to say that it's not that the expectation of getting that business back to strength is gone at all. I think our confidence in that business in the medium and long term is as high as it's ever been. But I would say our current guess is it's a slower ramp back and it's not just a hockey stick blade. Ajay, are you in a different position? I would say we're probably aligned on that. No?

Never so, sir. But I will say that we're not giving guidance just yet. And in this pandemic, that's not an advisable thing to do. So we're going to wait until the end of February when we announce our results. And at that time – we're talking now of a second wave and what that may do in Europe and shutting down things. On the other hand, we are seeing things opening up in Asia quite significantly and even for us. So we'll just wait. The good news is, look at the resiliency in our business where we are able to offset these opposing forces in our different segments. People are certainly getting used to it. There are certainly courts opening up, trial date getting scheduled and that's our work going. But as Steve said, it's best to assume gradual recovery and we'll get there in February to give specific guidance.

Thank you.

Thank you, Andrew.

[Operator Instructions]. Our next question comes from Tobey Sommer with Truist Securities. Please go ahead.

Good morning, Tobey.

Good morning. Do you have the appetite for more aggressive share repurchase? I don't know whether you're at a point to see the stock market open, but stock is down sharply. And I also want to know, could you do that and also have the capacity to take advantage of dislocation at competitors, either by hiring individuals and small groups and/or potentially acquisitions?

Let me say this. We have the capacity to – the number one priority in our company is to make sure we treat great talent well. First, the great talent we have in our company but then secondly, to always leave ourselves the opportunity – the financial opportunity to jump on great talent whether or not it happens to be accretive to the P&L near term or not. So absolutely, we have the ability to do that. And I think it's quite independent of our ability to repurchase shares because the reality, attracting talent tends to hit EBITDA. It doesn't tend to be a big cash outflow and the share repurchase is really a cash issue. I don't know whether Ajay wants us to comment on specific intentions with respect to share buybacks. So let me defer – I would say we don't typically comment on that. We have – I would say this, we have a terrific balance sheet and over my tenure here and Ajay's tenure, we have shown an ability to buy back shares when we think it's appropriate, but I don't think we ever comment on specific intentions. Am I right, Ajay?

You are, sir. And just look at what we have done. We have a demonstrated ability and enormous capacity. Our debt loads are down. Our revolver remains available. Valuations in terms of what are out there in public space are a lot more than our stock, so we – I don't think I need to say more.

Thank you. Could you remind us on the remaining authorization for repurchase? And then maybe switching to Corporate Finance and Restructuring, how do you get the confidence to describe the potential sort of more medium-term outlook for waves of bankruptcies that you mentioned?

The remaining authorization, Ajay, do you know the number? I think it's --

At the end of the quarter, it was in the $180 million odd range. It’s in my prepared remarks.

Thank you.

So in terms of our confidence about Corp Fin, I think – you can look at – look, there's both internal things and then there's external things. The external things you can look at Moody's expectations for bankruptcies over the next 12 and 24 months. You can look at Standard & Poor's, based on creditworthiness, these are – the truth is that although there's been loose money, that hasn't necessarily made every company back into a fully solvent company. It's just allowed people to avoid restructuring for a period of time. And so there's a lot of external measures that suggest there's a pent-up demand for that. The other – the more internal factor is what we've done over this period of time has continued to strengthen our business. Our global presence is enormously different than it was – not only – certainly 10 years ago when we were particularly a U.S.-based company and particularly creditor-side focused. Today, we're still that strong there, but we have company side in the U.S., we have terrific practice in Latin America, we have a terrific practice in London, terrific practice in Germany, strengthened practice in Australia. We have presence around the globe and we continue to add to it. So the combination of the pent-up demand and our strength in just – and my experience is when you got pent-up demand and you're a powerful company, you're going to do pretty well. The issue is it's just – you can't tell exactly what the waves are just because you don't know exactly how the government policies intersect that. But that's the basis for our long-term optimism, Tobey. Does that answer your question?

Sure. That's helpful. And I guess given the more modest trajectory here with just a couple of months in the year, without giving any – asking you to give us numerical guidance, could you maybe discuss some of the more important factors that we should consider when trying to model next year in the absence of company guidance?

So the key variables have always been the restructuring, M&A, fraud, major disputes, antitrust issues. Any major dislocation that you see in the newspaper, you can imagine that there's a good likelihood of a significance around the globe that FTI may be involved. And there's different margins in each of these areas and there's – so for example, on the bankruptcy side. If there's public disclosure at least in the U.S. of the bankruptcies, if you see a pickup in that or if you see speculative-grade default is projected to be around 6%, it's supposed to remain around 6% and the 6% is quite elevated in fact. If that remains there, there's more junk bonds being downgraded than upgraded and so on and so forth, if that remains, that's a precursor for a robust – unfortunate, but robust bankruptcy space. And that is amongst the highest margins businesses for us. So there is that driver. If you see private equity getting active with the cheap money and trying to do more transactions, we do have private equity clients. If you see M&A pick up and you see antitrust cases, or for example in the technology space, there's lots of talk and we don't talk about specific clients, but that is usually very good for us. Now in terms of our – so those are some cases. If you see a major fraud or dispute investigation and there have been some public cases with the audit firms, you can imagine we may be involved on the other side. Now where the margins come in is if we have a headcount spike more so than the revenue spike that we are not in the profit maximizing mode in each quarter. We're building the company for long-term growth. So clearly, we could cut back on the hiring or not have hired as much and driven more profits, but then that would be shortchanging our future. And we haven't done that nor do we need to given the balance sheet that we have.

Thanks for the context.

Thanks, Tobey.

That concludes the question-and-answer session and today’s conference. Thank you for attending today’s presentation. You may now disconnect.