Epiq Systems Announces Second Quarter 2014 Financial Results in Line With Expectations

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KANSAS CITY, Kan., July 31, 2014 (GLOBE NEWSWIRE) -- Epiq Systems, Inc. (Nasdaq:EPIQ) today announced results for the second quarter of 2014 with operating revenue of $115.5 million, up 10% compared to $105.0 million for the prior year quarter. June 30, 2014 year-to-date operating revenue was $231.7 million, up 11% compared to $207.9 million for the prior year.

Highlights for the quarter included:

− Second quarter 2014 operating revenue of $78.5 million for the Technology segment represented organic growth of 12% compared to 2013, reflecting Epiq's continued global leadership position in the eDiscovery market. June 30, 2014 year-to-date Technology operating revenue of $159.7 million increased 28% versus the prior year.

− Epiq was named claims administrator for Energy Future Holdings Corp., the largest Chapter 11 filing since 2011.

− Second quarter 2014 net cash provided by operating activities was $19.6 million.

− Declared cash dividend of 9.0 cents per share of outstanding common stock, which will be paid on September 9, 2014 to shareholders of record at the close of business on August 1, 2014.

− Epiq's Board of Directors appointed Brad D. Scott as president and chief operating officer and Karin-Joyce (KJ) Tjon as executive vice president and chief financial officer.

Tom W. Olofson, chairman and CEO of Epiq Systems stated, "We are very excited to have Brad Scott and KJ Tjon on our executive committee as we continue to build upon our strengths and focus on achieving both our short-term and long-term objectives. Our eDiscovery business remains in a leadership position in a highly fragmented market as we continue to increase our international presence including the recent launch of processing and hosting capabilities in Toronto. We also announced a 9.0 cents per share cash dividend during the quarter, reflecting our ongoing commitment to returning value to our shareholders."

Financial Summary

Second quarter and year-to-date 2014 results were impacted by one-time reorganization expenses totaling $9.3 million and $11.9 million pre-tax, respectively ($0.16 and $0.20 per diluted share after tax, respectively). The impact related to these adjustments is excluded from non-GAAP financial results. Compared to $2.8 million net income reported for the second quarter 2013, second quarter 2014 resulted in a net loss of $3.4 million. June 30, 2014 year-to-date net loss was $5.7 million compared to net income of $6.8 million in the prior year. Second quarter 2014 net loss per diluted share was $0.10 compared to net income per diluted share of $0.08 in the prior year quarter. June 30, 2014 year-to-date net loss per diluted share was $0.16 compared to net income per diluted share of $0.18 in the prior year.

Second quarter 2014 adjusted net income was $7.4 million compared to $8.7 million in the prior year quarter, and adjusted net income per diluted share was in line with consensus at $0.21 compared to $0.24. June 30, 2014 year-to-date adjusted net income was $14.2 million compared to $17.1 million for the prior year, and adjusted net income per diluted share was $0.40 compared to $0.46. Second quarter 2014 adjusted EBITDA was $24.7 million compared to $23.4 million in the prior year quarter. June 30, 2014 year-to-date adjusted EBITDA was $48.1 million compared to $45.7 million for the prior year. Adjusted net income, adjusted net income per share and adjusted EBITDA are all non-GAAP financial measures. See the accompanying tables herein for information regarding these measures and a reconciliation to the most comparable GAAP measure.

Epiq's year-to-date financial results reflect the impact of strategic investments directed at the global expansion of the eDiscovery franchise, a higher mix of lower margin document review services compared to the prior year, fewer bankruptcy filings due to the current cyclical downturn in the bankruptcy market and a delay in activity related to a large settlement administration engagement.

Technology

Second quarter 2014 operating revenue for the Technology segment was $78.5 million, up 12% compared to $70.1 million in the prior year quarter. June 30, 2014 year-to-date operating revenue was $159.7 million, up 28% compared to $124.9 million in the prior year. Second quarter 2014 adjusted EBITDA was $20.5 million compared to $21.8 million in the prior year quarter, and June 30, 2014 year-to-date adjusted EBITDA was $42.8 million compared to $38.2 million in the prior year.

Technology operating revenue growth in the second quarter 2014 occurred in both electronically stored information ("ESI") solutions and document review services as compared to the second quarter 2013. Global ESI solutions remained the primary service offering, representing approximately 54% of the second quarter 2014 Technology operating revenue, while global document review services represented approximately 46%. Epiq's international presence continues to benefit from both existing and new clients, which is reflected in international operating revenue growth in the second quarter 2014 of 19% compared to the prior year quarter. International eDiscovery revenue represented approximately 19% of total Technology segment revenue in the second quarter 2014 compared to 18% in the prior year.

Bankruptcy and Settlement Administration

Second quarter 2014 operating revenue for the Bankruptcy and Settlement Administration segment was $36.9 million compared to $34.9 million in the prior year quarter. June 30, 2014 year-to-date operating revenue was $72.0 million compared to $83.0 million in the prior year. Second quarter 2014 adjusted EBITDA was $13.9 million compared to $10.9 million in the prior year quarter, and June 30, 2014 year-to-date results were $25.9 million compared to $25.5 million in the prior year.

Second quarter 2014 operating revenue for bankruptcy was $23.9 million compared to $20.8 million in the prior year quarter, and settlement administration operating revenue was $13.0 million compared to $14.1 million. Year-to-date bankruptcy revenue was $41.3 million compared to $41.7 million in the prior year. Year-to-date settlement administration revenue was $30.7 million compared to $41.3 million in the prior year.

Epiq's bankruptcy franchise continues to maintain market leadership in this period of low bankruptcy filings and revenues and was recently named claims administrator for Energy Future Holdings Corp., the largest chapter 11 filing in recent years. According to the American Bankruptcy Institute, total bankruptcy filings in the United States decreased 12 percent in the first six months of 2014 compared to the prior year with commercial filings down 22 percent for the same period. Settlement administration operating revenues decreased compared to the prior year due to activity related to a large private anti-trust engagement in the prior year period in addition to a delay in expected activity related to that same engagement this year.

Conference Call

Epiq will host a conference call today at 3:30 p.m. central time to discuss these results. The internet broadcast of the call can be accessed on the Investors page at www.epiqsystems.com. To listen by phone, please call (877) 303-6311 before 3:30 p.m. central time. International participants may dial (631) 813-4730. Please register at least 5 minutes prior to the start of the presentation to ensure timely access.

An archive of the internet broadcast will be available on Epiq's website until the next earnings call. A recording of the call will also be available through August 7, 2014, beginning approximately two hours after the call ends. To access the recording, please call (855) 859-2056 and enter conference ID number 69072460.

About Epiq Systems

Epiq Systems is a leading global provider of technology-enabled solutions for electronic discovery, bankruptcy, and class action and mass tort administration. We offer full-service capabilities to support litigation, investigations, financial transactions, regulatory compliance and other legal matters. Our innovative technology and services, combined with deep subject-matter expertise, provide reliable solutions for the professionals we serve. Visit us at www.epiqsystems.com.

Use of Non-GAAP Financial Measures

This press release includes the following non-GAAP financial measures: (i) adjusted net income (net income adjusted for amortization of acquisition intangibles, share-based compensation, acquisition and related expense, one-time technology expense, loan fee amortization, litigation expense, timing of recognition of expense, reorganization expense, loss on disposition of assets, and the effect of tax adjustments that are outside of Epiq Systems' anticipated effective tax rate, all net of tax), (ii) adjusted net income per share, calculated as adjusted net income on a fully diluted per share basis, and (iii) adjusted EBITDA (net income adjusted for depreciation, amortization, share-based compensation, acquisition and related expense, one-time technology expense, net expense related to financing, litigation expense, timing of recognition of expense, reorganization expense, loss on disposition of assets, and provision for income taxes). Income taxes typically represent a complex element of a company's income statement and effective tax rates can vary widely between different periods. Epiq Systems uses an approximate statutory tax rate of 40% to reflect income tax effects in the presentation of its adjusted net income and adjusted net income per share. Utilization of an approximate statutory tax rate for presentation of the non-GAAP measures is done to allow a consistent basis for investors to understand financial performance of the company across historical periods.

Although Epiq Systems reports its results using GAAP, Epiq Systems also uses non-GAAP financial measures when management believes those measures provide useful information for its shareholders. These non-GAAP financial measures are intended to supplement the GAAP financial information by providing additional insight regarding results of operations and to allow a comparison with other companies, many of whom use similar non-GAAP financial measures to supplement their GAAP results. Certain items are excluded from these non-GAAP financial measures to provide additional comparability measures from period to period. These non-GAAP financial measures will not be defined in the same manner by all companies and may not be comparable to other companies. These non-GAAP financial measures are reconciled in the accompanying tables to the most directly comparable measures as reported in accordance with GAAP, and should be viewed in addition to, and not in lieu of, such comparable financial measures.

Forward-looking and Cautionary Statements

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which include, but are not limited to, any projection or expectation of earnings, revenue or other financial items; the plans, strategies and objectives of management for future operations; factors that may affect our operating results; new products or services; the demand for our products or services; our ability to consummate acquisitions and successfully integrate them into our operations; future capital expenditures; effects of current or future economic conditions or performance; and industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These forward-looking statements are based on our current expectations which may not prove to be accurate. Forward-looking statements may be identified by words or phrases such as "believe," "expect," "anticipate," "should," "planned," "may," "estimated," "goal," "objective," "seeks," and "potential" and variations of these words and similar expressions or negatives of these words. Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), provide a "safe harbor" for forward-looking statements. Because forward-looking statements involve future risks and uncertainties, listed below are a variety of factors that could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. These factors include (1) failure to keep pace with technological changes and significant changes in the competitive environment, (2) risks associated with cyber-attacks, interruptions or delays in services at data centers, (3) risks of errors or failures of software or services, (4) any material changes in our total number of client engagements and the volume associated with each engagement, (5) any material changes in our clients' deposit portfolio or the services required or selected by our clients in engagements, (6) changes in or the effects of pricing structures and arrangements, (7) risks associated with the handling of confidential data and compliance with information privacy laws, (8) risks associated with developing and providing software and internet-based technology solutions to our clients, (9) ability to attract, develop and retain executives and other qualified employees, (10) risks associated with the integration of acquisitions into our existing business operations, (11) risks associated with our international operations, (12) risks associated with foreign currency fluctuations, (13) risks of litigation against us or failure to protect our intellectual property, (14) material changes in the number of bankruptcy filings, class action filings or mass tort actions each year, or changes in government legislation or court rules affecting these filings, (15) any material non-cash write-downs based on impairment of our goodwill, (16) risks associated with indebtedness and interest rate fluctuations, (17) overall strength and stability of general economic conditions, both in the United States and in the global markets, and (18) other risks detailed from time to time in our SEC filings, including our most recent Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. In addition, there may be other factors not included in our SEC filings that may cause actual results to differ materially from any forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements contained herein to reflect future events or developments, except as required by law.

EPIQ SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
2014 2013 2014 2013
REVENUE:
Operating revenue $115,451 $104,976 $231,671 $207,884
Reimbursable expenses 9,605 8,396 16,656 29,078
Total Revenue 125,056 113,372 248,327 236,962
OPERATING EXPENSE:
Direct cost of operating revenue (exclusive of depreciation and amortization shown separately below) 57,533 49,528 115,168 102,024
Reimbursed direct costs 9,434 8,072 16,237 27,614
Selling, general and administrative 46,374 36,931 90,538 69,337
Depreciation and software and leasehold amortization 9,255 7,391 17,955 14,390
Amortization of identifiable intangible assets 3,166 4,736 6,286 9,702
Fair value adjustment to contingent consideration -- -- 1,142 --
Loss on disposition of property and equipment 339 4 351 22
Other operating expense 157 49 226 96
Total Operating Expense 126,258 106,711 247,903 223,185
INCOME (LOSS) FROM OPERATIONS (1,202) 6,661 424 13,777
INTEREST EXPENSE (INCOME):
Interest expense 3,852 2,004 8,729 3,843
Interest income (9) (8) (13) (12)
Net Interest Expense 3,843 1,996 8,716 3,831
INCOME (LOSS) BEFORE INCOME TAXES (5,045) 4,665 (8,292) 9,946
PROVISION FOR (BENEFIT FROM) INCOME TAXES (1,626) 1,823 (2,575) 3,167
NET INCOME (LOSS) $ (3,419) $2,842 $ (5,717) $6,779
NET INCOME (LOSS) PER SHARE – DILUTED $ (0.10) $0.08 $ (0.16) $0.18
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING – DILUTED 35,365 36,859 35,115 36,702
Cash dividends declared per common share $0.09 $0.09 $0.18 $0.18
EPIQ SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
June 30, December 31,
2014 2013
ASSETS
ASSETS:
Cash and cash equivalents $24,990 $40,336
Trade accounts receivable, net 138,117 145,134
Property and equipment, net 72,225 72,118
Internally developed software costs, net 14,938 16,201
Goodwill 404,611 404,302
Other intangibles, net 35,973 41,117
Other 32,932 28,573
TOTAL ASSETS $723,786 $747,781
LIABILITIES AND EQUITY
LIABILITIES:
Current liabilities, excluding debt $50,724 $65,215
Indebtedness 307,002 312,457
Other non-current liabilities 43,137 44,095
EQUITY 322,923 326,014
TOTAL LIABILITIES AND EQUITY $723,786 $747,781
EPIQ SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended
June 30,
2014 2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (5,717) $6,779
Non-cash adjustments to net income (loss):
Depreciation and amortization 24,241 24,092
Other, net 5,791 5,721
Changes in operating assets and liabilities, net
Trade accounts receivable 6,907 (45,175)
Other, net (12,452) (6,786)
Net cash provided by (used in) operating activities 18,770 (15,369)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment, internally developed software (22,531) (15,406)
Other, net (93) 4
Net cash used in investing activities (22,624) (15,402)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in indebtedness (4,285) 37,170
Common stock repurchases (3,627) (3,508)
Cash dividends paid (6,334) (6,499)
Payment of deferred acquisition consideration (4,957) --
Debt issuance costs (837) --
Other, net 6,978 1,073
Net cash provided by (used in) financing activities (13,062) 28,236
Effect of exchange rate changes on cash 1,570 339
NET DECREASE IN CASH AND CASH EQUIVALENTS $ (15,346) $ (2,196)
EPIQ SYSTEMS, INC.
RECONCILIATION OF NET INCOME TO
ADJUSTED EBITDA
(In thousands)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
2014 2013 2014 2013
NET INCOME (LOSS) $ (3,419) $2,842 $ (5,717) $6,779
Plus:
Depreciation and amortization 12,421 12,127 24,241 24,092
Share-based compensation 737 2,825 4,276 4,364
Acquisition and related expense (1) 211 84 1,800 112
One-time technology expense (2) 1,532 309 3,645 889
Expense related to financing, net (3) 3,767 1,950 8,637 3,757
Litigation expense (4) 1,457 65 1,569 966
Timing of recognition of expense (5) -- 726 -- 978
Reorganization expense (6) 9,267 604 11,922 604
Loss on disposition of assets 351 -- 351 --
Provision for income taxes (1,626) 1,823 (2,575) 3,167
28,117 20,513 53,866 38,929
ADJUSTED EBITDA $24,698 $23,355 $48,149 $45,708
(1) Acquisition and related expense includes one-time costs associated with acquisitions.
(2) One-time technology related costs associated with security and consolidation of data centers from acquisitions.
(3) Expense related to financing is net of interest income.
(4) Litigation expense related to significant one-time matters.
(5) Adjustment to match timing of expenses to be consistent with timing of GAAP revenue and recoveries for settlement administration matters.
(6) Expenses primarily related to one-time charges for post-employment benefits.
EPIQ SYSTEMS, INC.
RECONCILIATION OF NET INCOME
TO ADJUSTED NET INCOME
(In thousands, except per share data)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
2014 2013 2014 2013
NET INCOME (LOSS) $ (3,419) $2,842 $ (5,717) $6,779
Plus (net of tax(1)) :
Amortization of acquisition intangibles 1,900 2,841 3,772 5,821
Share-based compensation 442 1,695 2,566 2,618
Acquisition and related expense (2) 163 85 1,149 136
One-time technology expense (3) 919 185 2,187 533
Loan fee amortization 219 114 900 227
Litigation expense (4) 1,016 181 1,225 864
Timing of recognition of expense (5) -- 436 -- 587
Reorganization expense (6) 5,560 362 7,153 362
Loss on disposition of assets 210 -- 210 --
Effective tax rate adjustment (7) 392 (43) 742 (811)
10,821 5,856 19,904 10,337
ADJUSTED NET INCOME $7,402 $8,698 $14,187 $17,116
ADJUSTED NET INCOME PER SHARE – DILUTED $0.21 $0.24 $0.40 $0.46
(1) Individual adjustments are calculated using a tax rate of 40%.
(2) Acquisition and related expense includes one-time costs associated with acquisitions.
(3) One-time technology related costs associated with security and consolidation of data centers from acquisitions.
(4) Litigation expense related to significant one-time matters.
(5) Adjustment to match timing of expenses to be consistent with timing of GAAP revenue and recoveries for settlement administration matters.
(6) Expenses primarily related to one-time charges for post-employment benefits.
(7) The effective tax rate adjustment reflects a non-GAAP provision for income taxes at a tax rate of 40%.
EPIQ SYSTEMS, INC.
OPERATING REVENUE
(In thousands)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
2014 2013 2014 2013
Technology $78,523 $70,126 $159,692 $124,913
Bankruptcy 23,890 20,799 41,255 41,651
Settlement Administration 13,038 14,051 30,724 41,320
Total Bankruptcy and Settlement Administration 36,928 34,850 71,979 82,971
TOTAL OPERATING REVENUE $115,451 $104,976 $231,671 $207,884
EPIQ SYSTEMS, INC.
ADJUSTED EBITDA
(In thousands)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
2014 2013 2014 2013
Technology $20,537 $21,760 $42,835 $38,152
Bankruptcy and Settlement Administration 13,903 10,923 25,854 25,522
Unallocated Corporate (1) (9,742) (9,328) (20,540) (17,966)
TOTAL ADJUSTED EBITDA $24,698 $23,355 $48,149 $45,708
(1) Unallocated corporate adjusted EBITDA excludes expenses related to share-based compensation, acquisition and related expense, one-time technology expense, non-routine litigation expense, timing of recognition of expense, loss on disposition of assets, and one-time reorganization expense.
EPIQ SYSTEMS, INC.
CALCULATION OF DILUTED NET INCOME PER SHARE AND
DILUTED ADJUSTED NET INCOME PER SHARE
(In thousands, except per share data)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
2014 2013 2014 2013
NET INCOME (LOSS) $ (3,419) $2,842 $ (5,717) $6,779
Amounts re-allocated to nonvested shares -- (28) -- (67)
NET INCOME (LOSS) ADJUSTED FOR DILUTED CALCULATION $ (3,419) $2,814 $ (5,717) $6,712
BASIC WEIGHTED AVERAGE SHARES 35,365 35,933 35,115 35,765
Adjustment to reflect share-based awards -- 926 -- 937
DILUTED WEIGHTED AVERAGE SHARES(1) 35,365 36,859 35,115 36,702
NET INCOME (LOSS) PER SHARE – DILUTED $ (0.10) $0.08 $ (0.16) $0.18
ADJUSTED NET INCOME $7,402 $8,698 $14,187 $17,116
Amounts re-allocated to nonvested shares -- (28) -- (67)
ADJUSTED NET INCOME ADJUSTED FOR DILUTED CALCULATION $7,402 $8,670 $14,187 $17,049
BASIC WEIGHTED AVERAGE SHARES 35,365 35,933 35,115 35,765
Adjustment to reflect share-based awards -- 926 -- 937
DILUTED WEIGHTED AVERAGE SHARES 35,365 36,859 35,115 36,702
ADJUSTED NET INCOME PER SHARE – DILUTED $0.21 $0.24 $0.40 $0.46
(1) Diluted weighted average shares outstanding for the three months and six months ended June 30, 2014 exclude the dilutive impact of options and nonvested shares outstanding due to the GAAP net loss reported.

CONTACT: Lew Schroeber, Investor Relations Telephone: 913-621-9500 Email: ir@epiqsystems.com

Source:Epiq Systems, Inc.