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Legal Technology Solutions Provider Epiq Systems Reports Second Quarter 2015 Results and Reaffirms 2015 Outlook

KANSAS CITY, Kan., Aug. 3, 2015 (GLOBE NEWSWIRE) -- Epiq Systems, Inc. (NASDAQ:EPIQ), a leading global provider of integrated technology solutions for the legal profession, today announced results for its second quarter ended June 30, 2015. Epiq will hold a conference call today at 4:30 pm ET to review its results (details below).

Summary Results (Unaudited)
Q2
(In millions, except share count and per share data) 2015 2014
Segment Operating Revenue
Technology $93.2 $78.5
Bankruptcy & Settlement Administration $37.4 $36.9
Total Operating Revenue $130.6 $115.4
Net Loss ($3.2) ($3.4)
Net Loss Per Diluted Share ($0.09) ($0.10)
Adjusted EBITDA(1) $24.7 $24.7
Adjusted Net Income(1) $6.7 $7.4
Adjusted Earnings Per Share(1) (Diluted) $0.18 $0.21
Adjusted Diluted Shares (in thousands) 37,119 35,765
Net Cash from Operating Activities $24.1 $19.6

(1) Adjusted net income, adjusted EBITDA and adjusted earnings per share are all non-GAAP financial measures. See the accompanying tables herein for information regarding these measures and reconciliation to the most comparable GAAP measure.

Q2 Financial Overview

Epiq's second quarter 2015 operating revenue increased by 13% year over year reflecting higher demand for global electronic discovery (eDiscovery) solutions and including $7.7 million from recently acquired Iris Data Services, both within the Technology segment. Quarterly Adjusted EBITDA of $24.7 million and Adjusted EPS of $0.18 per diluted share were in line with company expectations.

International eDiscovery operations continue to provide double-digit revenue growth but downward pricing pressure in North American electronically stored information (ESI) services negatively impacted operating margins. A modest increase in Bankruptcy and Settlement Administration operating revenue was due primarily to services provided for large class action and data breach engagements during the second quarter.

The second quarter 2015 net loss was primarily due to acquisition related expenses of $1.0 million and amortization of identifiable intangible assets of $2.9 million resulting from the acquisition of Iris Data Services.

Total quarterly capital expenditures, including software development costs and unallocated corporate expenses, declined over 30% in the current quarter compared to the same period last year. Net cash provided by operating activities increased by $4.5 million compared to the prior year period.

Recent Business Highlights

  • Completed the acquisition of Iris Data Services on April 30, 2015. Iris was named Best eDiscovery Managed Services Provider at the ALM LegalTech News Innovation awards in July 2015.
  • Appointed key senior business leaders, including:
    • Ellen Jones Polhamus, senior vice president, eDiscovery client services
    • Pamela Corrie, managing director, corporate restructuring
    • Jill Bauer, managing director, Chapter 7 bankruptcy solutions and fiduciary services
    • Catherine Ostheimer, vice president, marketing and communications
  • Declared dividend of $0.09 per share, Epiq's 21st consecutive quarterly dividend.

"Epiq's technology platform, expertise and growing global footprint position our company as a leader to serve a broad range of needs within the legal community," said Tom W. Olofson, chairman and CEO of Epiq Systems. "Our eDiscovery revenues rebounded from a decline in the first quarter of 2015 to grow nearly 22% in the most recent quarter, before adding two months of revenue contribution from our acquisition of Iris Data Services. We also demonstrated success winning new engagements and expanding our service delivery in bankruptcy and settlement administration.

"Our acquisition of Iris Data Services closed on April 30, and we are making solid progress on the integration of back-office functions, such as HR and finance, as well as the sales organizations. The addition of Iris's market leading managed services solutions enhances our mix of transactional and recurring revenue while also broadening our client base. Importantly, the demand for managed services continues to grow as we have already signed 12 new clients year to date in 2015, compared to 15 new clients for the full year 2014, and we have completed 20 contract extensions with existing clients. This trend demonstrates our commitment to delivering an efficient, market-leading and cost-effective experience to our clients. We will continue to build on this track record to drive value for our clients and shareholders."

Segment Review

Technology Segment (eDiscovery)
Q2
(In millions)(Unaudited) 2015 2014
Operating Revenue $93.2 $78.5
Adjusted EBITDA $24.0 $20.5
Operating Revenue Mix
By Service Type
Electronically Stored Information (ESI) 57% 54%
Document Review 43% 46%
By Region
North America 80% 81%
Europe and Asia 20% 19%

Epiq's Technology segment provides integrated technology solutions for electronic discovery (eDiscovery), including global electronically stored information (ESI) and global document review. The proportion of higher margin ESI revenue relative to document review increased during the second quarter of 2015 on a year over year basis and pricing pressure in North American ESI services continued to impact operating margins. The increase in Adjusted EBITDA relative to last year's quarter was supported by higher margin work in Europe and Asia and incremental business from Iris Data Services.

Bankruptcy and Settlement Administration Segment
Q2
(In millions)(Unaudited) 2015 2014
Operating Revenue $37.4 $36.9
Adjusted EBITDA $9.5 $13.9

A low level of Chapter 11 bankruptcy filings persisted in the second quarter, a trend that is expected to continue for the balance of 2015. According to the American Bankruptcy Institute, total bankruptcy filings in the United States decreased 12 percent in the first six months of 2015 compared to the prior year with commercial filings down 19 percent for the same period. Epiq continues to win non-traditional work and special projects from current clients to supplement operating revenue in this segment. Services provided for large class action and data breach engagements during the second quarter helped to drive a year over year increase in segment revenue. Segment Adjusted EBITDA declined primarily due to an increase in lower margin noticing and mailing services provided for those engagements and a decrease in bankruptcy related services compared to the same period last year.

2015 Financial Guidance

Epiq confirmed its 2015 financial outlook based on currently available information. As previously disclosed, for the full year 2015 operating revenue is expected to range between $500 and $520 million, adjusted EBITDA between $109 and 115 million and adjusted EPS between $0.90 and $0.96.

Conference Call Information:
Call Dial in: (877) 303-6311 or (631) 813-4730
Webcast URL: http://www.epiqsystems.com/investors/corporate-overview/
Audio replay: (855) 859-2056, ID# 87248410, available through August 10, 2015

About Epiq Systems

Epiq Systems is a leading global provider of integrated technology solutions for the legal profession, including 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, deep subject-matter expertise and global presence spanning 45 countries served from 20 locations allow us to provide secure, reliable solutions to the worldwide legal community. 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, intangible asset impairment expense, acquisition and related expense, one-time technology expense, loan fee amortization, litigation expense, timing of recognition of expense, reorganization expense, gain or loss on disposition of assets, strategic review expense, and the effect of tax adjustments that are outside of Epiq Systems' anticipated effective tax rate, all net of tax), (ii) adjusted earnings per share, calculated as adjusted net income on a fully diluted per share basis, and (iii) adjusted EBITDA (net income adjusted for depreciation and amortization, share-based compensation, intangible asset impairment expense, acquisition and related expense, one-time technology expense, net expense related to financing, litigation expense, timing of recognition of expense, reorganization expense, gain or loss on disposition of assets, strategic review expense, and provision for (benefit from) 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 includes forward-looking statements. These forward-looking statements 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 and services; our ability to consummate acquisitions, successfully integrate them into our operations and achieve expected synergies; future capital expenditures; effects of current or future economic conditions or performance; 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. In this press release, we make statements that plan for or anticipate the future. 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, 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) interruptions or delays in service at data centers we utilize for delivery of our services, (5) undetected errors in, and failure of operation of, software products releases, (6) our reliance on third-party hardware and software, (7) failure of our financial, operating and information systems to operate as intended, (8) our inability to attract, develop and retain executives and other qualified employees, (9) risks associated with the integration of acquisitions into our existing business operations, (10) risks associated with our international operations, (11) lack of protection of our intellectual property through patents and formal copyright registration, (12) risks of litigation against us for infringement of proprietary rights, (13) 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, (14) any material non-cash write-downs based on impairment of our goodwill, (15) fluctuations in our quarterly results that could cause fluctuations in the market price of our common stock, (16) our inability to maintain compliance with debt covenant ratios, (17) risks associated with indebtedness and interest rate fluctuations, (18) risks associated with provisions of our articles of incorporation that prevent a takeover of Epiq, (19) overall strength and stability of general economic conditions, both in the United States and in the global markets, (20) the impact of our current review process of strategic alternatives, and (21) other risks detailed from time to time in our filings with the Securities and Exchange Commission, including our 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 Securities and Exchange Commission 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 OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2015 2014 2015 2014
REVENUE:
Operating revenue $130,557 $115,451 $238,312 $231,671
Reimbursable expenses 7,453 9,605 18,726 16,656
Total Revenue 138,010 125,056 257,038 248,327
OPERATING EXPENSE:
Direct cost of operating revenue (exclusive of depreciation and amortization shown separately below) 67,901 57,533 118,930 115,168
Reimbursable expenses 7,290 9,434 17,794 16,237
Selling, general and administrative expense 44,773 46,374 83,837 90,538
Depreciation and software and leasehold amortization 9,498 9,255 18,263 17,955
Amortization of identifiable intangible assets 4,810 3,166 7,495 6,286
Impairment of goodwill and identifiable intangible assets 1,162 -- 1,162 --
Fair value adjustment to contingent consideration (1,201) -- (1,201) 1,142
Other operating expense, net 2,861 496 2,998 577
Total Operating Expense 137,094 126,258 249,278 247,903
INCOME (LOSS) FROM OPERATIONS 916 (1,202) 7,760 424
INTEREST EXPENSE (INCOME):
Interest expense 5,480 3,852 9,709 8,729
Interest income (1) (9) (5) (13)
Net Interest Expense 5,479 3,843 9,704 8,716
LOSS BEFORE INCOME TAXES (4,563) (5,045) (1,944) (8,292)
BENEFIT FROM INCOME TAXES (1,322) (1,626) (436) (2,575)
NET LOSS ($3,241) ($3,419) ($1,508) ($5,717)
NET LOSS PER COMMON SHARE INFORMATION:
Basic ($0.09) ($0.10) ($0.04) ($0.16)
Diluted ($0.09) ($0.10) ($0.04) ($0.16)
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING:
Basic 36,536 35,365 36,409 35,115
Diluted 36,536 35,365 36,409 35,115
Cash dividends declared per common share $0.09 $0.09 $0.18 $0.18
EPIQ SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
June 30, December 31,
2015 2014
ASSETS:
Cash and cash equivalents $18,916 $54,226
Trade accounts receivable, net 148,158 117,854
Property and equipment, net 78,910 70,579
Internally developed software, net 15,134 14,713
Goodwill 478,970 404,187
Other intangibles, net 55,795 29,605
Other 58,488 47,088
Total Assets $854,371 $738,252
LIABILITIES:
Current liabilities, excluding debt 69,880 53,395
Indebtedness 410,652 313,481
Other non-current liabilities 50,999 46,439
Total Equity 322,840 324,937
Total Liabilities and Equity $854,371 $738,252
EPIQ SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
June 30,
2015 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($1,508) ($5,717)
Non-cash adjustments to loss:
Depreciation and amortization 25,758 24,241
Other, net 11,731 5,615
Changes in operating assets and liabilities, net
Trade accounts receivable (14,958) 6,907
Other, net 6,908 (12,276)
Net cash provided by operating activities 27,931 18,770
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment; and internally developed software (16,330) (22,531)
Cash paid for business acquisitions, net of cash acquired (123,649) (302)
Other 108 209
Net cash used in investing activities (139,871) (22,624)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in indebtedness 87,643 (4,285)
Common stock repurchases (4,017) (3,627)
Cash dividends paid (6,629) (6,334)
Payment of acquisition-related liabilities (29) (4,957)
Debt issuance costs (1,644) (837)
Other, net 1,518 6,978
Net cash provided by (used in) financing activities 76,842 (13,062)
Effect of exchange rate changes on cash (212) 1,570
NET DECREASE IN CASH AND CASH EQUIVALENTS ($35,310) ($15,346)
EPIQ SYSTEMS, INC.
RECONCILIATION OF NET LOSS
TO ADJUSTED EBITDA
(Unaudited)
(In thousands)
Three months ended Six months ended
June 30, June 30,
2015 2014 2015 2014
NET LOSS ($3,241) ($3,419) ($1,508) ($5,717)
Plus:
Depreciation and amortization expense 14,308 12,421 25,758 24,241
Share-based compensation expense 5,305 737 6,926 4,276
Intangible asset impairment expense 1,162 -- 1,162 --
Acquisition and related expense (1) 1,710 211 1,915 1,800
One-time technology expense (2) -- 1,532 -- 3,645
Expense related to financing, net (3) 5,383 3,767 9,493 8,637
Litigation (recovery) expense, net (4) 17 1,457 (504) 1,569
Timing of recognition of expense (5) -- -- (290) --
Reorganization expense (6) 790 9,267 1,972 11,922
(Gain) Loss on disposition of assets (31) 351 (13) 351
Strategic review expense 632 -- 1,678 --
Benefit from income taxes (1,322) (1,626) (436) (2,575)
27,954 28,117 47,661 53,866
ADJUSTED EBITDA $24,713 $24,698 $46,153 $48,149
(1) Acquisition and related expense includes one-time costs associated with acquisitions and fair value adjustments to contingent consideration.
(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 and recovery 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 LOSS
TO ADJUSTED NET INCOME
(Unaudited)
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
2015 2014 2015 2014
NET LOSS ($3,241) ($3,419) ($1,508) ($5,717)
Plus (net of tax) (1) :
Amortization of acquisition intangibles 2,886 1,900 4,497 3,772
Share-based compensation 3,183 442 4,156 2,566
Intangible asset impairment expense 697 -- 697 --
Acquisition and related expense (2) 1,029 163 1,175 1,149
One-time technology expense (3) -- 919 -- 2,187
Loan fee amortization and write-off 631 219 993 900
Litigation (recovery) expense, net (4) 147 1,016 (24) 1,225
Timing of recognition of expense (5) -- -- (174) --
Reorganization expense (6) 474 5,560 1,183 7,153
(Gain) Loss on disposition of assets (19) 210 (8) 210
Strategic review expense 379 -- 1,007 --
Effective tax rate adjustment (7) 503 392 341 742
9,910 10,821 13,843 19,904
ADJUSTED NET INCOME $6,669 $7,402 $12,335 $14,187
ADJUSTED EARNINGS PER SHARE – DILUTED $0.18 0.21 $0.33 $0.40
(1) Individual adjustments are calculated using a tax rate of 40%.
(2) Acquisition and related expense includes one-time costs associated with acquisitions and fair value adjustments to contingent consideration.
(3) One-time technology related costs associated with security and consolidation of data centers from acquisitions.
(4) Litigation expense or recovery 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
(Unaudited)
(In thousands)
Three months ended Six months ended
June, 30 June, 30
2015 2014 2015 2014
Technology $93,159 $78,523 $163,182 $159,692
Bankruptcy 17,629 23,890 37,711 41,255
Settlement Administration 19,769 13,038 37,419 30,724
Total Bankruptcy and Settlement Administration 37,398 36,928 75,130 71,979
TOTAL OPERATING REVENUE $130,557 $115,451 $238,312 $231,671
EPIQ SYSTEMS, INC.
ADJUSTED EBITDA
(Unaudited)
(In thousands)
Three months ended Six months ended
June 30, June 30,
2015 2014 2015 2014
Technology $24,042 $20,537 $42,251 $42,835
Bankruptcy and Settlement Administration 9,477 13,903 22,181 25,854
Unallocated Corporate (1) (8,806) (9,742) (18,279) (20,540)
TOTAL ADJUSTED EBITDA $24,713 $24,698 $46,153 $48,149
(1) Unallocated corporate adjusted EBITDA excludes expenses related to share-based compensation, impairment expense related to acquired intangible assets, acquisition and related expense, including fair value adjustments to contingent consideration, one-time technology expense, non-routine litigation expense or recovery, timing of recognition of expense, gain or loss on disposition of assets, strategic review expense, and one-time reorganization expense.
EPIQ SYSTEMS, INC.
CALCULATION OF NET LOSS PER SHARE AND
DILUTED ADJUSTED EARNINGS PER SHARE
(Unaudited)
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
2015 2014 2015 2014
NET LOSS ($3,241) ($3,419) ($1,508) ($5,717)
BASIC WEIGHTED AVERAGE SHARES 36,536 35,365 36,409 35,115
Adjustment to reflect share-based awards -- -- -- --
DILUTED WEIGHTED AVERAGE SHARES(1) 36,536 35,365 36,409 35,115
NET LOSS PER SHARE – DILUTED ($0.09) ($0.10) ($0.04) ($0.16)
ADJUSTED NET INCOME $6,669 $7,402 $12,335 $14,187
BASIC WEIGHTED AVERAGE SHARES 36,536 35,365 36,409 35,115
Adjustment to reflect share-based awards 583 391 607 236
DILUTED WEIGHTED AVERAGE SHARES 37,119 35,756 37,016 35,351
ADJUSTED EARNINGS PER SHARE - DILUTED $0.18 $0.21 $0.33 $0.40
(1) Diluted weighted average shares outstanding for the three and six months ended June 30, 2015 and 2014 exclude the dilutive impact of options outstanding due to the GAAP net loss reported for the respective periods.

CONTACT: Investor Contacts Kelly Bailey Epiq Systems 913-621-9500 ir@epiqsystems.com Chris Eddy or David Collins Catalyst Global 212-924-9800 epiq@catalyst-ir.com

Source:Epiq Systems, Inc.