CRA International Inc (CRAI) 2004 Q4 法說會逐字稿

Good day and welcome everyone to the Charles River Associates fourth-quarter and full 2004 conference call. Today's call is being recorded. A replay of the call will be available beginning at 2 PM Eastern time today and will run through Monday, January 24, at midnight. The rebroadcast dial-in number is 719-457-0802 and you will be asked for the confirmation code which is 354087. Again, that number is 719-457-0820 and the confirmation code of 354087. You may also listen to the webcast on CRA's Web site located at www.crai.com.

In addition today's news release is posed on the site for those of you who did not receive it by e-mail or fax. With us today are CRA's President and Chief Executive Officer, Mr. James Burrows; and Executive Vice President and Chief Financial Officer, Mr. Phil Cooper. At this time for opening remarks, I would like to turn the call over to Mr. Cooper. Please go ahead, sir.

Statements in this conference call concerning the future business, operating results and financial condition of the Company are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectations as of today January 18, 2005 and are subject to a number of factors and uncertainties. Information contained in these forward-looking statements is inherently uncertain and actual performance and results may differ materially due to many important factors.

Such factors that could cause actual results to differ materially from any forward-looking statements made by the Company include among others; dependence upon key personnel, attracting and retaining qualified consultants, dependence upon outside experts, utilization rates, risk inherent in international operations, intense competition, the integration of our acquisitions, InteCap, TCA and NECG; NeuCo's performance, changes in accounting standards, rules and regulations, the potential loss of clients and professional liabilities. Further information on potential factors that could affect the Company's financial results is included in recent filings with the SEC. Jim?

Thanks Phil. CRA continued to produce strong top and bottom line growth in Q4 completing one of our successful years and our nearly 40 year history. Revenue for the quarter increased nearly 50 percent to $58.3 million from a $39 million in the comparable period a year ago. Q4 results include $12.6 million of revenue from InteCap.

We have been reporting revenue from InteCap as a separate practice group since the acquisition last May. As we mentioned on our last call, InteCap's operations are now fully integrated within CRA. Beginning in fiscal 2005 we will be reporting our revenue on a consolidated basis.

On the bottom-line, CRA reported Q4 net income of $4.4 million or 42 cents per diluted share, up 46 percent per net income and 50 percent for EPS from Q4 a year ago. As previously discussed in last quarter's conference call, we engaged outside consultants to assist CRA in addressing unfavorable tax consequences that resulted from activities in foreign jurisdictions. Through this comprehensive tax planning process we were able to reduce our effective tax rate to approximately 41 percent in the fourth quarter.

We continued to see robust demand in the majority of our practice areas this quarter. Merger and acquisition activity accelerated through the second half of calendar year '04. It was a very busy quarter in our litigation practices including both competition and finance. There was also a considerable amount of litigation regulatory work in the energy and utilities sector. Demand for litigation related consulting services was generally healthy and the overall improvement in the corporate spending environment contributed to better results for CRA across the board.

Competition and finance continue to be the top performers. The competition practice posted year-to-year, Q4 revenue growth of nearly 25 percent partly as a result of a significant increase in M&A work and continued antitrust litigation and of the effects of the timing of activities of certain major projects.

M&A revenue increased over 80 percent from the year earlier level and accounted for about 12 percent of percent of total CRA revenue in Q4. Although we can't discuss most of our business in this area, one of our significant engagements is in connection with the Sprint/Nextel merger. CRA is also working on behalf of the Evanston Northwestern Health Care or ENH, a hospital system north of Chicago in its defense of Federal State commission allegations that it gained market power through its acquisition of another hospital in the Chicago suburbs in 2000.

The SEC claims that ENH subsequently raised prices anticompetitively. This lawsuit going to trial in February was discussed on the front page of the Wall Street Journal just yesterday as an important case for future hospital merger activity.

CRA's finance practice continued as robust growth in Q4 with year-over-year revenue growth of 14 percent for the quarter and 38 percent for the full year. Fundamentals in the finance practice have been solid for the past 6 to 8 quarters and should contribute to continued growth and demand in coming quarters as well.

Operating as a single integrated group of InteCap, our intellectual property practice is now one of our largest practice areas. As an example in this area, CRA testified on behalf of Pfizer in the Pfizer versus Rambaxy patent infringement trial in the District Court of Delaware. It is an ANDA action in which Rambaxy is challenging Pfizer's patents covering lipitor, a multibillion dollar drug. Lehman Brothers provided coverage of the trial including our specific testimony in a research report to its clients.

Turning to our business consulting practices and (indiscernible) environment or what we call E&E continued its healthy growth with revenues increasing by 17 percent year-over-year in Q4. We continued to work actively with such clients as Mirant, National Energy and Gas Transmission and Enron. Revenues from energy clients in the Asia Pacific region also grew strongly during 2004 and the acquisition of Network Economics Consulting Group, NECG, should expand the opportunities to continue its growth in the Asia-Pacific regions.

The work in Q4 and other areas of the E&E practice was also strong especially work related to the Federal Energy Regulatory Commission's various rulemakings with regard to competitive electricity markets. We anticipate this work will continue at similar levels in FY '05. CRA currently is assisting a certain matters in connection with a large electric utility merger that was announced last month.

The E&E practice also began a major comprehensive strategic transmission review in December 2004 for a large North American utility. CRA is assisting several large electric utilities and analyzing the financial impacts of current and future environmental regulations including policies to address global climate changes as well as the impact of these regulations and the amount of environmental capital expenditures and the types of new generation capacity to construct.

Turning to the chemicals and petroleum practice, Q4 revenues were impacted by continued security concerns in the Middle East. Revenues declined by about 20 percent from a year ago in substantial part because Middle Eastern related revenue out of our London office declined from the year earlier quarter. As we reported last quarter security issues in Saudi Arabia have created significant operational challenges. While we initially expected to have some consultants return to the region in the fourth quarter, that proved to be too optimistic on our part.

Looking forward we expect that our revenue growth in chemicals and petroleum will resume, not only as a result of getting back to work in Saudi Arabia and of increased activity elsewhere in the Middle East but also as a result of improving business prospects and utilization rates outside of the Middle East.

Revenue from clients in North America and Europe continued to grow in Q4 due in large part to some key engagements from the specialty, chemical and oil and gas production sectors and we expect this growth to continue.

Notable Q4 engagements in the chemicals and petroleum practice included supporting a client and testing the robustness of its strategy to participate in the hydrogen economy. In this assignment we combined our industry insights into energy and transportation with our expertise and collaborative game theory. As the hydrogen economy is characterized by many uncertainties including timing, winning technologies and winning participants, we found that game theory tools were an ideal way to develop creative insights on how the competitive landscape might evolve.

From the work, our client gained a clear understanding of how it could shape the development of the hydrogen economy through partnerships and alliances as well as the key triggers that would require a course correction in their investment strategy.

CRA also is supporting one of the leading non-OPEC national oil companies and financial and economic evaluations of all aspects of the countries upstream oil and gas business now responsible for production of over 1 million barrels per day. Our support involves both developing fit for purpose systems and models and working with the client in evaluation of important strategic decisions and negotiations with international oil companies. We're also advising that client on a major gas utilization initiative which is planned to begin operations toward the end of the decade.

Looking at other practices, aerospace and defense, metals and materials, pharmaceuticals and transportation practices all enjoyed year-over-year revenue growth in Q4 and early indications suggest that trends in these industries will provide CRA with further growth opportunity in fiscal 2005.

Our pharmaceuticals practice had record revenues in FY '04. We also published a report on innovation in the pharmaceutical sector for the European Commission. This is a result of a year-long effort looking at the future of innovation in this sector and the roll will be played by European policymakers. The effort was led by a consultant from our pharmaceuticals practice based in the London office.

In addition, the head of our global pharmaceuticals practice was selected by the industry to deliver a tutorial and pharmaceutical pricing in person and on DVD as requested by the judge in the high-profile average wholesale price litigation. He was also retained as an expert witness in this litigation.

Looking at our business from a geographic perspective, revenue recorded by our non-U.S. subsidiaries represented approximately 9 percent of total revenue in Q4 compared with 10 percent in the sequential third quarter of fiscal 2004 and 14 percent in Q4 last year. The addition of InteCap which has a larger domestic presence lowered international revenue by about 3 percentage points in Q4 and Q3. With the addition of NECG in Australia in November we have expanded our presence in the Asia/Pacific market and we will see those results in FY '05. We continue to actively evaluate opportunities to strengthen our presence and boost revenues overseas.

Our primary non-U.S. focus is on boosting the performance of our UK subsidiary and expanding our penetration in continental Europe. We have identified a number of opportunities including key staff additions and acquisitions which we are pursuing to achieve those objectives. Our goal is to return to profitability in Europe and create the type of brand awareness on the other side of the Atlantic that we enjoy here in the United States.

Looking next at our NeuCo subsidiary, revenues grew 72 percent from $1.9 million in Q4 last year to $3.2 million. This year's Q4 revenue includes approximately $400,000 from our contract with the Department of Energy compared with $400,000 for Q3 of this year and 0 in Q4 of last year. NeuCo contributed $1.1 million to CRA's operating income in Q4 versus $300,000 a year ago. As a reminder, although we believe that NeuCo's revenues will continue to increase over the long term, NeuCo's revenues are likely to continue to be volatile in the near term with the recognition of revenue being especially reporting-period sensitive.

On the headcount front, excluding acquisitions we added 32 new consultants in Q4 bringing the total number of non-acquisition related professional staff to 376 representing a nearly 10 percent headcount addition for the year. Of particular note on the recruiting front, Chetan Sanghvi, a well-known expert and industrial organization and antitrust economist, recently joined CRA as a Vice President in our competition practice. Dr. Sanghvi is frequently called upon to provide expert economic and statistical testimony in antitrust cases and in matters involving trademark and patent infringement, breach of contract and (indiscernible) Land Act violations.

Before I turn the call over to Phil, I would like to comment briefly on the issue of acquisitions. Q4 was another busy quarter on this front. We not only completed the integration of InteCap, but we also made 2 smaller acquisitions that reinforced our core competency in worldwide energy consulting, broadened our position in the Australian regulatory market and expanded our footprint in the Asia-Pacific regions.

The first of these acquisitions was Tabors Caramanis & Associates, the Cambridge Massachusetts en0ergy consulting concern. Acquiring TCA has added several of the electricity transmission industry's premier practitioners to CRA's consultant base. TCA specializes in policy development, business planning, productivity improvement, technical analysis and project implementation in the energy and utility sectors. We acquired substantially all of TCA's assets including 15 billable consultants and current consulting projects.

Included in this total of 15 are some of the utility industry's premier practitioners. In particular, Richard Tabors, the founder and principle at TCA, is an engineering economist with more than 30 years of domestic international experience in energy systems planning and pricing. He is one of the pioneers of the theories of spot pricing of electricity and marginal cost pricing of transmission services. As a result of the acquisition, we now have greater flexibility to respond to the growing worldwide demand in this important market.

The second completed near the end of Q4 was Network Economics Consulting Group. NECG, based in Canberra Australia and with offices in Sydney and Melbourne is a premier provider of regulatory and economic consulting services in the Asia-Pacific region, with clients in the energy, telecom, transportation and other industries. The acquisition of NECG greatly enhances CRA's position in the Australian regulatory market and provides us with an important platform for growth in the Asia-Pacific region.

NECG's 34 consultants bring a wealth of expertise in regulatory economics and policy analysis to CRA. In particular, Henry Ergas, founder and principle of NECG, has joined CRA's team as a world-renowned competition expert especially in telecommunications and other network industries.

CRA's performance in Q4 reflects the continued success of our blended corporate growth strategy combining organic growth with acquisitions to strengthen our service offerings or expand our geographic reach. It is a strategy we believe will enable us to deliver continued growth in future quarters.

With that, I'll turn the call over to Phil for the financial review.

Thanks, Jim. As always I would like to start my comments by reminding you that CRA's fiscal year operates on 13, four-week cycles producing quarters unequal in length. Q4, Q1 and Q2 typically are 12 weeks each while Q3 is a 16 week quarter.

Turning to the financial results please note that all of these statistics reflect the impact of acquisitions completed in fiscal 2004. As Jim said, Q4 revenue increased nearly 50 percent to 58.3 million from relative to the comparable period in fiscal 2003. Q4 results include approximately 12.5 million revenue from InteCap. TCA and NECG were acquired in mid-November and their revenue contribution for the period was de minimus.

Our consultant for fiscal 2004 was 476,000, representing an increase of approximately 4.4 percent compared with fiscal 2003, an 8.6 percent increase excluding the impact of InteCap. Our average billing rate per hour for the fiscal year was $310 representing no change from fiscal 2003 overall due to the impact of InteCap that came in to CRA with a lower average billing rate. For Legacy CRA, there is a 5.5 percent increase in average billing rate year-over-year.

Fourth quarter gross margin was 42.4 percent, a 180 basis point increase from 40.6 percent in Q4 of fiscal 2003 and a 390 basis point sequential increase from 38.6 percent in Q3 of this year. As I will elaborate later, higher gross margins were largely offset by an increase in SG&A expense as a percentage of revenue. Total reimbursable expenses were 7.2 million for Q4 2004 or 12.3 percent of revenue compared with 5.6 million or 14.4 percent of revenue for Q4 2003 and 10.6 million or 14.2 percent of revenue in the sequential third quarter of 2004.

Total consultant utilization in Q4 was 79 percent, down slightly from the 81 percent reported in Q3 of fiscal 2004 but up substantially from the 73 percent reported in the comparable period a year ago. So our fourth-quarter utilization enabled us to end the year within our target range of 78 to 80 percent. This metric fell below 80 percent for the first time in 3 quarters principally because of the continued softness in the chemicals and petroleum practice related to the geopolitical situation in the Middle East in our Q4.

SG&A expense for the fourth quarter was 16.1 million or 27.6 percent of total revenue compared with 10.1 million or 25.9 percent of revenue in Q4 last year and 17.2 million or 23.2 percent of revenue in Q3 of fiscal 2004. The year-over-year and sequential increases in SG&A as a percentage of revenue are largely the result of higher performance payments to outside consultants and Section 404 compliance and other Sarbanes-Oxley related expenses. The latter amounted to $800,000 in Q4 alone.

Performance payments made to outside consultants for Q4 totaled approximately $2.1 million representing about a $700,000 increase compared to Q3. The higher performance payments which result from an increase in the share of sourcing accounted for by our senior affiliated consultants and a decreased accounted for by employees were offset by reduced bonus obligations to employee consultants which reduced cost of services.

CRA's SG&A expenses are also significantly impacted by the SG&A expenses of our NeuroNet software subsidiary, NeuCo, which is consolidated in our results. As a software company, NeuCo has high gross margins and very high SG&A expenses in comparison with the consulting business. Although our gross margins and SG&A performance in Q4 was the opposite of what we suggested would be our experience going forward based on the acquisition of InteCap, we continue to expect that our gross margin and SG&A as a percentage of revenue will be lower than CRA's historical average in future quarters.

As we mentioned in Q3, virtually all of InteCap revenue is sourced by full-time employees and therefore bonuses related to this are included in cost of services. In contrast, in a Legacy CRA, 20 to 30 percent of revenue is sourced by non-employee consultants for whom performance payments are included in SG&A. As a result, other things being equal, the merged entity generally will have a tendency for both lower gross margins and lower SG&A expense ratios.

Fourth-quarter operating income increased 50.5 percent to 8.6 million compared with 5.7 million in Q4 of fiscal 2003. Operating margin was 14.8 percent compared with 14.7 percent in the fourth quarter of fiscal 2003 and 15.4 percent in the third quarter this year. The decline in operating margin is primarily the result of the high level of Sarbanes-Oxley cost that clustered in Q4. We continue to target operating margins of 15 percent or better and are pleased that despite the SOX expenses and lower than anticipated utilization, we are still in this neighborhood.

Turning to our tax rate, I'm sure you have all noticed that CRA effective tax rate was 41.4 for Q4 and was below the 47 percent expectation that we provided on the last conference call. As we discussed on that call, during Q4 we intended to engage outside consultants to assist CRA in the tax planning process to address the unfavorable tax consequences of trapped losses in our overseas operation, principally due to the decline in our London office of chemicals and petroleum engagements originating in the Middle East.

Based on the progress that we have made to date, we have been able to reduce our tax provision on our effective tax rate to 45.5 percent for the fiscal year requiring adjustments for Q4 down to 41.4 percent. Again, this is a process. We intend to monitor our overseas operations and the related tax implications closely to determine whether there are opportunities to our effective tax rate further in the future.

During the quarter we incurred a foreign exchange loss of approximately $46,000 versus a loss of about 200,000 for Q3. For the full year we have incurred a net foreign exchange loss of approximately 250,000. The currency impact is largely due to some movements between U.S. dollars and pounds sterling. Despite the significant decline in the value of the dollar, we are pleased to see significant progress in managing our foreign exchange exposure more actively through frequent settling of intercompany account balances and by self hedging our foreign dollar position.

Net income of Q4 grew 45.7 percent year-over-year to 4.4 million or 42 cents per diluted share from 3 million or 28 cents per diluted share in Q4 last year. We calculated Q4 earnings per share using 10.4 million weighted average shares diluted outstanding compared with 10.8 million shares outstanding in Q4 of fiscal 2003.

Professional headcount stood at 554 at the end of Q4. This compares with 498 at the end of Q3. Our current staff breakdown is 180 junior consultants and 374 senior consultants. Overall we added more than 210 consultants to our roster in fiscal 2004 including 178 from acquisitions. For fiscal 2005 we expect net organic headcount additions of approximately 10 percent over fiscal 2004 levels and any new special hiring initiatives and/or acquisitions to push this number higher.

Looking at the balance sheet, billed and unbilled receivables increased to 75.6 million compared with 70.5 million at the end of Q3. Current liabilities are up to 61.5 million at the end of Q4 compared with 46.9 million at the end of Q3 due primarily to timing of bonus payments. Increases in receivables and current liabilities are also reflecting the TCA and NECG acquisitions.

Total DSO, Day Sales Outstanding, were 99 days in Q4 down a shade from the Q3 level of 101 days. This consists of 66 days of unbilled and -- billed -- sorry, and 33 days of unbilled in Q4 compared with 34 days of unbilled and 67 days of billed in the sequential third quarter. We have brought our DSOs in line with our target range of 95 to 100 days and we intend to keep DSOs within the target range.

Cash and equivalents and long-term investments stood at 67.8 (ph) million at the end of Q4, up from 63 million at the end of Q3. This increase in cash was net of nearly $12 million paid in cash for the acquisitions of TCA and NECG. We generated cash from operations for Q4 of 18.3 mill and 31.7 million for the year compared with 4 million for Q4 a year ago and 22.4 million for fiscal '03.

Our capital expenditures totaled 2.5 million for the quarter and 8.7 million for the year compared with 1.6 million for Q4 a year ago and 6.2 million for fiscal '03. Depreciation and amortization expense was approximately 1.5 million compared with 1.8 million for Q3.

As discussed in our Q3 call, we engaged an outside appraiser to determine appropriate amount of goodwill and intangible assets to record associated with our InteCap acquisition. The appraisal was completed during Q4 and the value assigned to InteCap intangible assets was consistent with our Q3 estimate. So no adjustments were required. We've also reflected in Q4 the preliminary purchase price allocation for our NECG and TCA acquisitions. We will complete these allocations in finalizing our purchased accounting in 2005.

An analysis was also performed on the deferred tax assets of InteCap which were fully reserved at the time of the acquisition. Based on this analysis, we reduced goodwill during Q4 and established a net deferred tax asset of $17.4 million for the cash benefit that CRA expects to realize on future tax returns. This benefits future cash flow but not our income statement directly.

Turning briefly to our results for the full year, total revenue was 216.7 million, up 33 percent from 163.5 million in fiscal 2003. Operating income for the full year grew to 31.7 million from 20.2 million reported in fiscal '03, an increase of 56.8 percent. Net income increased 43 percent to 16.4 million from 11.4 million.

EPS totaled $1.55 compared with $1.16 a year earlier. EPS in fiscal 2004 was calculated using a diluted share count of 10.6 million shares compared with the lower 9.8 million shares in fiscal 2003, a 34 percent increase.

For 2004 CRA has elected to follow accounting principles Board opinion Number 25, accounting for stock issued to employees and accounting for its stock based compensation plan. This method allowed CRA to record no compensation expense as stock options have been issued to employees with exercise prices equal to fair value at the date of the grant. We anticipate implementing new accounting for stock options in Q4 2005 in accordance with the expected applications date of statement of financial accounting standards Number 123 revised and 148 relating to accounting for stock based compensation.

Under these methods, the estimated per value of the option is amortized over the options respected vesting period. We anticipate the impact on EPS of implementing this fair value method of accounting for stock options starting in Q4 '05 to be approximately 4 cents per share per quarter.

Last, in December we announced our decision pursuant to the terms of the indenture governing our 2 7/8 percent convertible senior subordinated debentures due 2034 to hardwire or commit contractually and irrevocably to settle with cash all of the principal amounts of the debentures upon conversion. This decision allows CRA to continue to account for the debentures under the treasury stock method of accounting. The treasury stock method of accounting allows CRA to report delusion only when and to the extent that the Company's average stock price per share for the reporting period exceeds the $40 conversion price.

For the first dollar per share that our average stock price exceeds the $40 conversion price of the debentures, we would include approximately 55,000 additional shares in our diluted share count. For the second dollar per share that our average stock price exceeds the $40 conversion price, we would include an additional 52,000 shares, approximately in our diluted share count. For each additional dollar per share increase above $40, our diluted share count would continue to increase by steadily diminishing increments based on a sliding scale.

Now back to Jim.

Thanks Phil. Looking back on the year, fiscal 2004 was a tremendous success for CRA from both a financial and operational standpoint. We posted the largest year-over-year increases in revenue and EPS in our history and we succeeded in raising our operating margins and utilization rates by a considerable margin. We increase organic headcount growth by almost 10 percent.

As a result of the 3 acquisitions we completed, we added 178 consultants and gained greater geographic exposure through the acquisition of 5 new offices, including offices in New York City and Chicago. That CRA achieved full-year utilization of 79 percent with such an aggressive headcount increase underscores the strength in demand we experience. We expect fiscal 2005 to be another successful year for CRA. Based on the current economic environment and strong trends in our core segments, as well as the impact of acquisitions completed in fiscal 2004, we expect fiscal 2005 revenue to grow in the range of 30 to 35 percent, income from operations growth of 25 to 30 percent, and net income growth in the 25 to 30 percent range. We also anticipate EPS growth of 25 to 30 percent based on a $45 stock price which is derived from the approximate average of the past 10 trading days.

As previously reported, share dilution is impacted by the accounting for our convertible debt, although no such dilution was actually realized in fiscal 2004. As a result of the dilution, EPS for fiscal 2005 may be higher or lower than our guidance based on the deviation in our share price from the $45 assumption on which we based our guidance. For example, if the share price increases to $50 per share, then we would be at the low end of the EPS guidance range. If the share price decreases to below $40 per share and everything else is held equal, then we would be at the high end of our guidance range. Our guidance assumes a full- year utilization rate of 78 to 80 percent, an average increase in consultant headcount of approximately 10 percent, and a conservative effective full-year tax rate of 45 to 46 percent based on our fiscal '04 results.

As Phil said earlier, we intend to monitor our overseas operations and the related tax implications closely to determine whether there are additional opportunities to lower our effective tax rate further in the future. One major factor that affects our quarterly earnings is the seasonal loss in consultant billing capacity associated with holiday and vacation periods. The first quarter is heavily impacted by Christmas and New Year's holiday weeks that affect 2 out of the 12 weeks in the quarter while third-quarter earnings are heavily impacted by summer vacations.

Our analysis indicates that holding all other factors constant at our current size Q1 EPS is negatively affected by roughly 7 cents per share from trend, Q2 EPS is positively affected by roughly 4 cents per share from trend as a result of low holiday and vacation time during that quarter. Corresponding effects in Q3 are negative 5 cents and in Q4, a positive 4 cents. The net swing from Q4 to Q1, and let me remind you again this is if there are no other changes in the business, as otherwise normal is roughly -11 cents.

These figures are all approximately seasonal effects, all other things being equal and usually all other things are not equal. With respect to Q1 of FY '05 in particular, there are several confounding factors that should significantly reduce but not completely offset the seasonal swing. First, at the beginning of the quarter we implemented an average rate increase of about 5 percent although the rate increase will not be fully effective until the second quarter.

Second, we completed the acquisitions of NEGC and TCA in a last 2 weeks of Q4 of FY '04. Because the billing rates in NEGA are in Australian dollars when we converted to U.S. dollars, average approximately 2 thirds of U.S. billing rates, the impact of the NECG acquisition on revenues and earnings is less than proportional to the added consultant headcount.

In addition, summer vacations and the Christmas and the New Year's holiday weeks occur in the same quarter in Australia. Nevertheless, the inclusion of a full quarter's results from both NECT and TCE will reduce the normal seasonal drop in earnings.

With that, I'll ask the operator to open the call for questions. Deanna?

(OPERATOR INSTRUCTIONS) Matt Litfin, William Blair.

Congratulations on a solid quarter and a great year. Give us a sense of why the cash flow was so strong relative to net income in the quarter since we don't yet have a cash-flow statement.

Thanks Matt, by the way. Of course you will shortly have a cash-flow statement in our 10-K but some of the effects are due to timing and some of the effects are due to net income at higher margin rates than we experienced a year ago. They are also due to the fact that there was high depreciation and amortization as deductions in those earnings and of course those are non-cash effect. (multiple speakers) There is also very low CapEx outside of the acquisition.

Great and could you also in the quarter comment on any currency effects whether positive or negative to you?

We had a slight loss in the quarter of about 4 to $6,000 due to currency impact. Again, we don't intend to be in the currency speculation business and what we have been doing has been to mitigate those changes from quarter to quarter by self hedging and movements in our intercompany accounts.

One more question if I might on the new guidance -- actually it has 2 parts to it. You mentioned in the guidance that you hoped for approximately 10 percent headcount growth in '[05. That is obviously more heads than ever before. Can you give us any visibility to the hiring pipeline that you have today? The other question is on terms of Sarbanes-Oxley, how big is that going to be in '05 kind of timing and size, etc?

Let me take the first one and I will led Phil handle the second. The hiring pipeline is actually very strong right now. We have a substantial number of individuals that are in the recruiting process. I'm talking here about senior hires. We think we will be seeing headcount growth throughout the year. I would remind you that we also have a seasonal effect, namely entry-level hires coming in from college and graduate school who normally arrive in the August/September timeframes, so they would be spread across Q3 and Q4. But there is significant recruiting activity going on today that will show up in Q1 and Q2.

On the Sarbanes-Oxley Section-404 cost, I believe that next year in '05 -- we are there already -- those costs are likely to be about 50 percent out-of-pocket with what we experienced in 2004. That is a rough guess-ti-mate but it is based upon talking to our counterparts in various other businesses. I'm also on a NASDAQ subcommittee -- affairs committee looking at stock costs. I believe our final number came in -- is coming in of the order of about 1.4 million for fiscal 2004. We would like to contain that cost to $700,000 or less for 2005 but as you might expect some of that is -- the law of the land has changed, a lot of that is not under our control. I hope that answers your question. By the way, obviously too, our audit costs have appreciated by more than normal rates of inflation at the same time.

Great, thank you very much.

Jim Janesky, Ryan Beck.

Good morning. A couple of questions. Was there anything unusual in the quarter with respect to InteCap either coming in higher or lower than your expectations?

There was nothing unusual. InteCap continues to have strong utilization. It's starting to become a difficult addition tangled up with Legacy CRA staff because of the cost assignment going on. But InteCap is a contributor to the Company.

Okay. When you look at the seasonality component -- thank you for breaking that out again, one of these times I will get it -- but did the seasonality component in the first quarter -- last year you were down from 28 cents in the 2003 fourth quarter to 24 cents in the February quarter, that was a swing of net 4 cents. This year after all else considered is about the same amount or less possibly, would that be appropriate?

There are two things. One, Jim, is that we are a larger Company and again all other things being equal we could as Jim said, expect a pure season effect of about 7 cents down; however, there are a number of confounding elements this time that I think work the other way and how that wrestling match is going to come out, we are not yet sure ourselves.

Okay, but Jim, did you kind of comment that some of it was positive offsets like the rate increase and the fact that you do have more headcount albeit in a highly seasonal area of the globe?

I think all of the offsets are in the positive direction and so what we are saying is we wouldn't see the full seasonal effect that we might otherwise see if nothing else were happening. But we don't think that the offsets will 100 percent offset the seasonal effect. So it will be somewhere in between.

Okay, good. In general when you look at -- you certainly understand with the contingent and other things why you would expect that net income growth would trail on both the high and the low end would trail revenue growth. Can you just kind of review what you think is going on in between revenue growth and income from operations that it would be the same?

Could you try that again, Jim?

Yes, you also have net income from operations growth trailing your revenue growth in 2005 and I'm just at the low and the high end, and I'm just wondering what is happening on a gross and SG&A lines that would cause that to happen?

Among the things working are the Q4 option costs on the net income.

Okay.

The SOX costs don't impact revenue obviously. With respect to EPS of course we do have some dilution and we gave examples of that as our stock price averages over $40 per share, the conversion price. But I would say that option costs are the major factor in net income that we need to be careful about.

Right. How about income from operations? What are the major factors and the difference between 25 to 30 percent income from operations growth and the 30 to 35 percent revenue growth?

We should expect that margins will be equal or higher. With nothing else happening in revenue and margins, we should see -- they should be in the same range.

Very good. Final question is, in the Middle East have you already had consultants go back to Saudi Arabia so part of your utilization assumptions in 2005 have to do with the fact that they are already back to work or are you assuming they will be going to back to work?

We do have some people who have been in Saudi Arabia recently. We actually have some new signed engagements. We are planning to get started generating revenue very soon.

All right, thank you.

Brett Manderfeld of Piper Jaffray.

Just a follow up to that question. Do you have a sense for the weakness in Saudi Arabia, how that affected your utilization? Was it a percentage or 2 percentage or is it more than that?

Of the 20 percent decline year-over-year in the practice revenue for chemicals and petroleum, well over half of that was due to Middle East revenues.

Okay. Half is due to Middle East. Do you have a sense for how that might have impacted your overall utilization, Phil?

I don't have a precise number. Give me a second and ask another question.

In terms of the 10 percent headcount, should that be fairly linear? Will that be -- that will be more towards the tail end of the year, right, as Jim had mentioned, with the junior staff coming on board? Is that right?

That is right. It will be -- not entirely confined to the end of a year but it will be skewed toward the end of the year and at the same time I want to remind you that with respect to the existing addition of headcount that came on especially in late 2004, that a lot of that headcounts increase has a billing rate less than Legacy CRA.

Just one final question while you are looking for that. In terms of the 78 to 80 percent utilization, is there a way to quantify how much of that business is already locked in loaded for '05? And then, the opposite of that, how much of the business that you are doing currently do you expect to go away at this more at kind of a high-level?

Can you repeat that please?

In terms of how much business that you have already signed up looking into '05 is it say 80 or 90 percent of your revenue, Jim? Relative to what you have signed up currently, what are you forecasting to get to that 78 to 80 percent utilization, how much of that do you expect to go away realizing that these engagements can kind of start and stop pretty quickly?

I think the thing throughout our business is very heavily time materials work. So if we don't -- we can't really compute backlog in the normal sense of the word. We know we are busy now. We know that there is an asset stream in the engagements coming in so this is really based more on our belief of how utilized we can keep our people over time based on their demands right now as opposed to serve (indiscernible) the backlogs of our contracts. I can't really give you a precise answer to that.

I can't give you an exact answer in terms of the effects on utilization but I can certainly tell you that for example our revenues in fiscal '04 for Q4 were about 60 percent below the Q4 a year ago in '03. It is over just about $1 million of reduction right there. So obviously this hurts. It came in an environment in which almost all of our other practices were up.

Okay, great. Thank you.

The effect on profits are very highly leveraged because a lot of that $1 million dropped straight to the bottom line.

Sandra Notardonato of Adam, Harkness.

Just a couple of follow ups on the chemical and petroleum practice. Do you have an exact number of people that you have out of the UK that would be deployed on Middle Eastern contracts?

I don't have a number handy. We have had at times a number of people working on the work there but everybody at CRA tends to be multiple assigned. So it's not necessarily a specific number of people that are in the same team all of the tame.

Sandy, let me add too that if we look back to some of our Saudi electric company projects we actually have had teams from the U.S. and Australia, significant number of headcount supplementing the people that initiated the projects out of London. And typically we have about 30 to 40 business consulting personnel in the UK and the Middle East revenues is a major portion of their activity.

Sorry if I'm not getting this but you had expected the chemical and petroleum practice to maybe pick up a little bit in the last quarter and it didn't. So does that mean that the utilization in the following quarter is going to increase because you are expecting business to pick up or because you're now going to redeploy those professional resources onto other projects?

The answer is we expect utilization of the staff that are in the chemicals and petroleum practice to be higher in the first quarter than they were in the fourth quarter. The fourth quarter result was definitely a disappointing one. It was less than we had anticipated going into the quarter and we do expect based on what we know now that we will be seeing higher utilization in that practice.

Excuse me. I would just add -- punching some calculator keys wildly here that the answer to Brett's question which is in the same topical area is that we believe that the impact on our overall utilization was of the order of 1 to 1.5 percent negative due to the reduction in the CMP practice.

That's helpful. Another clarification. Something that Jim was asking earlier about income from operations growth in comparison to revenue growth, the press release says 25 to 30 percent increase in income from operations revenues 30 to 35 percent and then if I'm not mistaken, Jim Burrows indicated that that growth should be the same. Did I hear that correctly?

Actually I would say that in terms of my current expectations are that net income will grow slower than revenue and I mentioned before the increased -- the Sarbanes-Oxley costs are going to be in there but we also have amortization from of our acquisitions, the intangible portion or our purchase price and so on are also involved. We are essentially forecasting a number that's -- we're estimating a number that comes out of our model. (multiple speakers) and that is what they are telling us right now.

I probably slightly misspoke. I think what I intended to say is that the margins -- the underlying margins in our business aren't really changing but they are -- in fact we are expecting them to improve, but there is a reporting issue in terms of because of the expensing of options and because of the effects of amortizing some of the costs from the acquisitions -- I think that's what lead to the difference that you were pointing to.

Just a couple more questions. The guidance that you have given for next year or for this year essentially; what is the organic components of that?

It is organic in the sense that the guidance includes no additional acquisitions. By the way, the organic growth for this quarter relative to last year-over-year was of the order of about 17 percent, a little over 17 percent of that 46 percent total revenue growth. In going forward, again I would put the organic growth to be of the order of say 15 percent and that is the 10 percent headcount plus the 5 percent billing rate increases.

Can you tell us how successfully you have been in getting InteCap's bill rates up?

There were increases that were put through in July which was their normal time for billing increases and there were some adjustments in the billing rate structure that resulted in some net additional amounts when we implemented our December increases for all of CRA. So there have been increases since they joined us.

We also -- in a sense what Jim is alluding to is that we have a structural difference in the way we bill with billing on a flat rate basis for our out-of-pocket miscellaneous support costs and also we have fees which we call network fees that are on top of the labor rates. Together, those really are on the order of another 10 percent on top of their rate structure. We are now billing those.

Just out of curiosity, when you cross-sell InteCap consultants with the core Charles River business, what kind of rates are you getting for those experts, for the InteCap experts?

They way we set rates -- rates are set by person, so it is whatever their rates are.

My last question, the percentage of reimbursable expenses this quarter was the lowest you've seen in some time. I know it's a difficult number to forecast but is that an indication of maybe what we should be modeling something between 12 and 14 percent for' 05 or how should we look at that?

Again as I have said before, the number could range in the 10 to 15 percent range. I think a middle of the road number is not a bad estimate. On the other hand as our -- to the extent that we've had a little movement up in litigation consulting with InteCap coming in relative to our business consulting, the reimbursable percentage tends to be a little bit higher --. It is all very interchangeable. Stick in that range of half.

Thank you very much.

(OPERATOR INSTRUCTIONS) Matt Litfin of William Blair.

A couple quick follow-ups. One is what was the consultant turnover in the quarter excluding the junior people that go back to school, etc.?

Sorry Matt, I don't have that number. It was low though. The normal activity that we experience of the junior consultants being here on a three-year cycle and very low single digit turnover at the senior level was experience. There was no deviation from that this quarter.

Good enough. One final one on NeuCo, obviously this was a record quarter for them. Do you think that this level of performance is sustainable even in the near-term here?

If you recall we have had a lower than expected quarter in the third quarter. This is a business that is quite affected period-to-period by the timing of closing major projects and the revenue becoming a recognizable under GAAP. And there were a couple of projects that flipped from the third quarter into the fourth quarter and so you see a below trend number in the third quarter and an above trend number in the fourth quarter. Happily we continue to experience a very good pipeline at NeuCo and we hope that will continue. Jim?

We do expect NeuCo's revenues for all of FY '05 to be above what they were in FY '04 and in fact NeuCo will continue to show the kinds of growth that they have been shown historically. However as I mentioned in my notes, forecasting is very difficult because these are software contracts that are very lumpy. Revenue recognition is an issue. So it is very difficult to forecast quarter by quarter but NeuCo is feeling optimistic as they go into FY '05 about what the year will look like.

Thank you.

It appears there are no further questions at this time. Mr. Burrows, I'd like to turn the conference back over to you for any additional or closing remarks.

Thank you, operator. Thanks to everybody. We look forward to speaking with you in our first quarter conference call. This concludes today's call.

Bye.