CRA International Inc (CRAI) 2005 Q1 法說會逐字稿

Good day, everyone. And welcome to the Charles River Associates first quarter fiscal 2005 conference call. Today's call is being recorded. You may listen to the webcast on CRA's website located at www.crai.com. In addition today's news release is posted 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.

Thank you, Jeff. 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, March 17, 2005. And they are the subject -- 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, risks inherent in international operations, intense competition, the integration of acquisitions, NeuCo's performance, changes in accounting standards, rules and regulations, the potential loss of clients and professional liability. Further information on potential factors that could affect the Company's financial results is included in recent filings with the SEC. Jim?

Thanks, Phil. After a great year in fiscal 2004, CRA overcame our usually first quarter seasonality and got off to an outstanding start in fiscal 2005. For the quarter, revenue grew more than 60 percent to record first quarter level of $61.7 million from $38.5 million in Q1 of last year. That income increased support $0.6 million, up 80 percent from the first quarter a year ago. And earnings per diluted share increased to $0.43 up 79 percent from a year ago. Taking into account a loss posted by NeuCo's this quarter the momentum we're seeing in our core business is compelling. Organic growth, excluding last year's acquisitions in NeuCo, was over 25 percent compared to Q1 of last year. Our litigation revenues grew over 75 percent over Q1 of last year resulting from a general growth in demand, continued growth in M&A buildings and finance litigation, and the impacts of our FY '04 acquisitions. CRA is involved in many of the major deals requiring a competition review that has been announced by Corporate America over the past few months. M&A revenue grew more than 300 percent from Q1 of a year ago, accounting for about 11 percent of the Company's total first quarter revenue. This compares with approximately 4 percent of total revenue for Q1 of last year.

Some noteworthy examples of our work in the competition practice include the following: CRA's Staff and Senior Consultant Steve Salop filed a declaration with the SEC on behalf of Sprint and Nextel in connection with their proposed merger. CRA was retained by Crowell & Moring on behalf of Humana to assist them in obtaining clearance from the Department of Justice for the proposed acquisition of CarePlus, a Medicare HMO in Florida. CRA provided economic advice at Telstra, various pricing issues with the Australian Competition and Consumer Commission. Senior Consultant Carl Shapiro testified on behalf of the FTC in early January, in the FTC versus Unocal Litigation. The FTC alleges that Unocal illegally gained entry -- gained market power over the technology needed to produce the low emissions gasoline used in California.

In December 2004, the High Court of New Zealand issued a judgment in favor of the Inland Revenue Department in litigation between the IRD and several taxpayers. The IRD had engaged here to provide economic advice and 2 Senior -- CRA Senior Consultants, Professor Bradford Cornell of UCLA, and Professor Lewis Evans of Victoria University of Wellington provided expert evidence before the High Court. CRA continues to work with IBM in its defense against claims by Compuware in respect of copyright infringement, trade secret, misappropriation, and tying. In addition to the competition-related activity Q1 was another robust quarter for litigation-related consulting in general. Regulatory engagements of clients in the Energy and Utility Center also continue to produce significant growth. For example, CRA assisted in certain Federal and State regulatory matters in connection with the Excelon PSEG Utility merger that was announced in December 2004. If approved this merger will create the largest electricity utility in the country.

Our finance-related litigation also continues to register healthy growth with organic revenues up almost 20 percent from last year. With InteCap operating on a fully integrated basis intellectual property is now a major practice area for CRA, and IP, practice revenue grew nearly sevenfold from Q1 of last year. To give you an idea of the types of cases we're working on in Q4 -- in Q1. CRA acted as damage expert on a system patent case on behalf of Intergraph that resulted in settlements totaling approximately $375 million with Hewlett-Packard, Dell, and Gateway.

Our business consulting practices produced significant revenue growth in Q1 as well. Outside of the Middle East the chemicals and petroleum practice experienced a significant rebound in Q1. On a sequential basis, revenue for North American and European clients grew 15 percent from Q4, 2004 reflecting new engagements in the Specialty Chemical, Oil and Gas Production sectors. For example, since 2003 CRA has been supporting the gas production division of one of the leading nonOPEC national oil companies, including working with them to address investment planning, financial performance, and organizational effectiveness. In addition, we're currently providing implementation support for a new organizational structure that we developed with them.

In another example from our CMP practice we're redesigning the organizational structure, the division of a global chemical company that serves the health care industry. The project involves a team of our consultants working with a client team, leveraging CRA's knowledge of the health care pharmaceutical sectors, and the teams' deep experience and performance improvement. Once again, the main weakness in the chemical and petroleum practice within the Middle East, where business remains softer this year than last year due to security concerns.

Elsewhere in business consulting, CRA's energy and environment practice posted strong results in Q1 with revenue increasing by about 60 percent from a year ago. Approximately one fourth of that revenue growth is accounted for by billings and staff at Tabors Caramanis & Associates which CRA acquired near the end of Q4, with the balance being organic growth. In addition our involvement and ongoing engagements for major E&E clients, such as Mirant, National Energy and Gas Transmission, and Enron continued in Q1 as did work related to the Federal Energy Regulatory Commission's various rule makings related to competitive electricity markets.

As a specific example, CRA continued this involvement with certain regulatory matters associated with a larger electric utility merger that was announced late in 2004, as well as an ongoing strategic transmission review for a large North American utility. CRA continues to assess several large electric utilities and a large energy trade association in analyzing the financial impacts of current and future environmental regulations, including policies to address global climate change, as well as the impact of these regulations on the amount of environmental capital expenditures and the type of new generation capacity construct. CRA is also assisting electricity company restructure, our large power supply agreement that has a remaining term of over 20 years.

CRA's other business consulting practices, aerospace and defense, metals and minerals, pharmaceuticals and transportation, all posted solid year-over-year revenue growth in Q1. Revenues of these practices in total grew by over 80 percent from a year ago all of which is organic growth. Looking at our business from a geographic perspective, revenue recorded by our non-U.S. subsidiaries represented approximately 13 percent of total revenue in Q1, compared with 9 percent in the sequential fourth quarter of fiscal 2004, and 11 percent in Q1 of last year. This growth outside the United States primarily reflects the acquisition of Network Economics Consulting Group last quarter, which has significantly expanded our presence in the Asia/Pacific market.

Our primary non-U.S. focus is on boosting the performance of our U.K. subsidiary and expanding our penetration in Continental Europe. We have identified a number of opportunities, including key staff additions which we are pursuing to achieve these objectives. Our goal is to return to operating 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.

Turning now to our NeuCo subsidiary, I mentioned earlier that revenues were down in Q1, following an exceptionally strong fourth quarter. In Q1 the quarter-to-quarter volatility manifested itself on the negative side as revenue declined approximately 27 percent from $1.9 million in Q1 of last year to $1.4 million this quarter. Revenue this quarter included approximate contribution of $400,000 from the DOE contract. NeuCo's net loss was $281,000 in Q1 of fiscal 2005, compared with net income of $267,000 a year ago. NeuCo's performance in Q1 resulted in a negative $0.05 swing in EPS on a sequential quarter-to-quarter basis. Given that revenue recognition in a software business tends to be lumpy, we continue to anticipate quarter-to-quarter volatility of NeuCo's results. We expect Q2 to be similar to Q1. However, NeuCo continues to have an active pipeline of prospects. And NeuCo Management expects revenues for the second haft of the year to be higher than in the first half. Finally, we are aware that NeuCo was sued last week by Pegasus Technologies in Federal Court in Ohio for alleged patent infringement. We understand that NeuCo's lawyers are assessing the lawsuit and intend to defend NeuCo vigorously. Before I turn the call over to Phil, I'll comment briefly on head count.

CRA added 8 new consultants in Q1 bringing total professional staff to 562. On a year-over-year basis we had organic head count growth of approximately 9 percent. Our business plan calls for approximately 10 percent head count growth in fiscal 2005 with an increase skewed toward the end of the year as junior staff come on board during the Summer. We are actively recruiting all levels, and opportunistic and demand sensitive hiring during the year could result in an increase above our 10 percent planning target. To summarize the results CRA posted in Q1 demonstrate the continued success of our growth strategy which combines organic growth with acquisitions that strengthen our service offerings or expand our geographic reach. We expect this strategy to service well in the quarters ahead. 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, 4-week billing cycles, producing quarters unequal in length. Q1, Q2 and Q4 typically are 12 weeks each, while Q3 is a 16-week quarter. Turning to the financial results, as Jim said, Q1 revenue increased 60 percent to $61.7 million from $38.5 million in the comparable period in fiscal 2004. Q1 results include full quarter contributions from TCA and NECG, which CRA acquired in late fiscal 2004. Because our integration of these acquisitions is proceeding quickly, we are not breaking out their revenues. First quarter gross margin was 40.2 percent, a 280 basis point decrease from 43 percent in Q1 of fiscal 2004, and a 220 basis point sequential decrease from 42.4 percent in Q4 of fiscal 2004. Gross margin declined as a result of the increase in consulting work sourced by CRA Staff Consultants in Q1 as compared with Q1 of last year. And was offset by a decline in SG&A expenses as a percentage of revenue in line with our projections for CRA with the addition InteCap. Gross margin for Q1 was also adversely impacted because of NeuCo's performance as compared with both Q1 and Q4 of last year.

Total reimbursable expenses were $6.5 million or 10.5 percent of revenue. For Q1 2005, compared with $5 million or 13 percent of revenue for Q1 2004. And $7.2 million or 12.3 percent of revenue in the sequential fourth quarter of 2004. Total consultant utilization in Q1 was 80 percent, up a full percentage point from the 79 percent reported in Q4 of fiscal 2004. And up substantially from the 74 percent reported in the comparable period a year ago. The increase in CRA's consultant utilization rate is the result of robust demand nearly across the border and led to sequential revenue growth from Q4 to Q1 for the first time in 4 years. SG&A expenses for the first quarter were 15.8 million or 25.6 percent of total revenue, compared with $11.6 million or 30.2 percent of revenue in Q1 of last year. And $16.1 million or 27.6 percent of revenue in Q4 of fiscal 2004. As we mentioned in the past 2 quarters, the addition of InteCap gives us a higher Proportion of revenue source internally, which all other things being equal will tend to lower CRA's gross margin and SG&A expenses as a percentage of revenue.

After the unusual spike in Q4, in part because of SOX Section 404 expenses, we believe our Q1 results are a better reflection of the systematic pattern. Just a quick note on the Sarbanes-Oxley Act of 2002. CRA is pleased to report that it has received an unqualified opinion for the fiscal 2004 from its independent registered accounting firm on, not only its financial reporting, but also on the effectiveness of its internal controls over financial reporting. And Management's own assessment of the effectiveness of those internal controls. CRA was one of the first companies required to comply with the internal control reporting requirements of Section 404 of the Sarbanes-Oxley Act. We are very pleased with the results of our efforts in this area.

First quarter operating income increased approximately 83.5 percent to $9 million, compared with $4.9 million in Q1 of fiscal 2004. Operating margin was 14.6 percent, compared with 12.7 percent in the first quarter of fiscal 2004, and 14.8 percent in the fourth quarter of fiscal 2004. The small decline in operating margin is primarily the result of the $305,000 we absorbed in Q1 from our NeuCo subsidiary. We continue to target operating margins of 15 percent or better.

Turning to our tax rate, CRA's tax rate increased to 47 percent for the first quarter. Slightly above our full-year guidance range of 45 to 46 percent. The reason for the increase was a reserve we took for a blip in the performance of our New Zealand Office in Q1, which we believe to be a one-time event. We have continued to work with outside consultants on a tax planning process that will address the unfavorable tax consequences of tracked losses in our overseas operation. Despite the jump in Q1, and based on the progress that we've made to date in that process, we are lowering our effective tax rate expectations for the full year. We now expect our full-year effective tax rate to be in the range of 44 to 45 percent. This is down from our earlier expectation of 45 to 46 percent.

During the quarter we incurred a GAAP related foreign exchange loss of approximately $55,000 versus a loss of about $46,000 for Q4. We continue to be pleased with our progress in managing our foreign exchange exposure through frequent settling of intercompany account balances and by hedging our foreign dollar position. Interest expense for Q1 was $763 -- thousand dollars, compared with $43,000 for Q1 of last year. Reflecting the impact of our 2 7/8 percent of convertible bond. As we have pointed out before our convertible bond is providing a positive cash flow after taking into account the tax shield associated with the 7 percent interest tax deduction resulting from the contingent interest feature. Interest income for the quarter was $278,000 about $100,000 over the figure for Q1 of last year reflecting higher cash balances and higher yields on short-term investments.

First quarter fiscal 2005 net income grew 79.5 percent year-over-year to $44.6 million or $0.43 per diluted share from $2.6 million or $0.24 per diluted share in Q1 of last year. We calculated Q1 EPS using 10.8 million weighted-average diluted shares outstanding, compared with 10.7 million shares outstanding in Q1 of fiscal 2004. 202,000 shares included in this calculation for Q1 of fiscal 2005 were due to dilution from CRA's convertible bond offering. As Jim mentioned, professional head counts stood at 562 at the end of Q1 compared with 554 at the end of Q4. Our current staff breakdown is 184 junior consultants and 378 senior consultants. We continue to expect net organic head count additions of approximately 10 percent over fiscal 2004 levels. And any new special hiring initiatives and/or acquisitions could push this number higher.

Looking at the balance sheet, billed and unbilled receivables increased to $78.7 million, compared with $75.7 million at the end of Q4. Current liabilities are $61.9 million at the end of Q1, compared with $61.5 million at the end of Q4. Increases in receivables and current liabilities also reflect the TCA and NECG acquisitions. Total DSOs were 103 days in Q1, up from the Q4 level of 99 days. This consists of 41 days of unbilled and 62 days of billed in Q1, compared with 33 days of unbilled and 66 days of billed in a sequential fourth quarter. We're disappointed in our slip in billing efficiency in Q1, although some of it is directly traceable to the 2 acquisitions done in the last couple of weeks of our fiscal '04. We will be stepping up our focus on this metric, especially on the unbilled component to bring total DSOs back in line with our long-term goal of 95 to 100 days.

Cash and equivalence and short-term investments stood at $73.7 million at the end of Q1 up from 68 million at the end of Q4. We generated cash from operations in Q1 of $6.6 million, compared with $0.3 million in Q1 a year ago. We do anticipate, however, negative cash flow from operations in Q2 due to the payout of almost all fiscal '04 officer bonuses in this current quarter. Depreciation and amortization expense was approximately $1.5 million flat with the sequential fourth quarter.

Lastly, as we mentioned last quarter we anticipate implementing new accounting for stock options in Q4, 2005. In accordance with the expected application date of statement of Financial Accounting Standards numbers 123-R and 148 relating to accounting for stock base compensation. Under this method the estimated fair value of the options is amortized over the options respective investing periods. We anticipate the impact on EPS of implementing this fair value method of accounting for stock options in Q4 of '05 to be approximately $0.04 per share. Now, back to Jim.

Thanks, Phil. Based on the strength of our first quarter results and the continuation of the trends that led to that performance, we are raising our guidance for fiscal 2005. We now expect growth of 30 to 35 percent and income from operations, net income, and EPS up from our earlier expectation of 25 to 30 percent growth. These estimates are based on revenue growth at the high-end of the 30 to 35 percent range. A full-year utilization rate at the high-end of our 78 to 80 percent expectation. And improvement in our anticipated FY '05 effective tax rate to the 44 to 45 percent range down from our earlier expectation of 45 to 46 percent. And organic head count growth of 10 percent.

As indicated in our Press Release this morning, in order to estimate potential share dilution for our EPS guidance we utilize a stock price of approximately $44, which was the average closing price of the 10 trading days prior to yesterday. Deviations from this price will cause our EPS to vary based on the amount of share dilution from our convertible bond offering. We anticipate using this 10 trading day approach in providing EPS guidance going forward. With that I will ask the Operator to open the call for questions. Operator?

Thank you, sir. [OPERATOR INSTRUCTIONS]. And our first question today will come from Jim Janesky from Ryan Beck & Company. Please go ahead.

Yes, thank you. A couple of questions. First on your earnings per share expectations, Phil, I assume that includes the dilution from the option accounting; is that correct?

Yes.

Okay. Getting -- turning over to the business. Utilization, where do you think utilization can go before it tops out?

Well, I don't think that there's a hard cap on that from the point of view of the ability to provide ours, utilization can go up quite considerably. We have operated as high as 90 percent in our history as a public company. However, we do not -- that would be probably hard to achieve given our current business mix. So we think it is possible to increase from the 80 percent. I don't think I can really give you a hard cap on that.

Okay. But mid 80s probably wouldn't be out of the question?

Jim, our target really is to get over 80 percent because of the business mix that Jim Burrows referred to and the international component of our business. I would say that we reasonably should target 80 to 85 percent. So I would'nt -- I would be a little bit nervous about saying mid 80s to the extent that that includes numbers over 85 percent.

Okay, fair enough. With respect to merger and acquisition-related revenues, the percent that you reported this quarter, somewhere around the 10 or 11 percent range, is that -- that's significantly lower than where it was at its peak. And I know that you have acquired some other businesses that make the mix different. But where do you think that can go?

Well, the prior number, if we go into the 90s, of the order of 20 percent. Of course the Company is bigger now. And so the percentage implies a lot more dollars. But we were at 12 percent last quarter and 11 percent this quarter. It really obviously depends on deal flow in the market and the number of second requests and things of that sort. Obviously, this is the one part of our business that is procyclical. It varies with the business cycle.

Okay. And then final question, you have a lot on your plates internally, obviously, there's -- with the regulatory environment and increased M&A. You've done some acquisitions late last year, as well as throughout the year. To what extent do you think we're going to continue to see acquisitions throughout 2005?

Well, let me take the first cut and then turn it back over to Jim Burrows. In doing the -- in 2003 we didn't do any acquisitions. In 2004 we did 3. Throughout that period we are informing people, investors, that there really was a pretty full radar screen. By doing these 3 deals we did not empty the screen. So there are prospects for more. Now, CRA is very careful in not only its diligence and its feelings about people and the opportunities, InteCap we really talked to over a period beginning in October of 2001. NECG I believe we began in May of 2003. So we consistently spend a considerable amount of time talking to the various acquisition prospects. And as there's been a little inching up in the prices, the pricing metrics associated with that, that, of course, brings more sellers into the market. So there are opportunities. We're just a very careful buyer.

I think I would add to that that we are not -- our goal, our target 2005 is not to focus very much on acquisitions. However, we do have some modest-size opportunities that we've been talking to for quite a long time. These have strategic implications for us that would be the motivation for actually doing an acquisition if we did it.

There is no goal that says we've got to do 1 per year or 2 per year or whatever. It is entirely strategic and opportunistic at the same time.

And there's nothing -- we're not contemplating anything even remotely of the size of InteCap.

Okay. Thank you.

And our next question today will come from Piper Jaffray's, Brett Manderfeld. Please go ahead, sir.

Good morning, gentlemen.

Good morning, Brett.

I had a question just digging into utilization, obviously, a strong number, 80 percent. Was it fairly consistent between the core business before the acquisitions that you made last year? I guess what I'm getting at, is the utilization similar between the core business versus what you have acquired?

I think it is fair to say that our core business utilization as we report it for the various practices has been very strong organically which reflects itself in increased utilization. The InteCap's utilization is very characteristic of CRA's litigation component. It is not that different. NECG and TCA I think are -- the business consulting side is entirely comparable to the business consulting side of Legacy CRA. And the litigation side may be at the same rate as Legacy CRA or a little bit lower. But we're really talking about small percentage components of the entire consolidated firm.

I think another way of understanding is that the utilization of the Legacy portion of CRA is actually quite close to what the average requiring for the total Company is. So if we had not done any acquisitions there would have been a very similar increase in utilizations.

Okay. Great. In terms of pricing as well, can you talk about just overall pricing? And I think you had mentioned that you thought there was opportunity to increase pricing at InteCap and the other 2 smaller acquisitions, as well as we move through the year. Are you starting to see that take hold? Thanks.

CRA implemented a price increase on the Legacy Series staff of a little bit over 5 percent during the first quarter. There were some adjustments in the rate structure for the former InteCap staff that also took effect during the first quarter that resulted in some percentage growth. And their rates we are not making any predictions in particular about future growth for the acquired companies. The Legacy CRA rate increases have been 5 percent or better every year since we've been public. It is also true that the rate structure for Legacy Series is somewhat above that of the firms that we recently acquired. So we'll be evaluating that over time.

And Jim, was the adjustment at InteCap similar to the 5 percent increase in the Legacy Business?

No. What happened was, that there was an increase at InteCap which had already been scheduled there that took effect in July about the time -- in other words they are operating on a different annual increased pattern than we were. Their rate increases regularly occurred in July. So the July one went through as would have occurred anyway, even though it occurred after they joined us. What happened in the first quarter is that there is some additional charges that we have in our standard rate structure that were implemented for InteCap.

Okay. Great. One final question, just overall, I know it is hard to predict this, but what are your thoughts in terms of M&A work for the rest of the year? Are you forecasting kind of a similar type of contribution in the low double-digits for the rest of the year? Thanks.

Well, we continue to see active activity. There are clearly a number of major mergers that have been announced recently. We tend to get contacted on many of those. We continue to get contacts -- we continue to get higher. So unless something dramatic happens in the economy in general, I would imagine that we would continue to have strong M&A revenues. There is also a momentum there, because even if no new acquisitions are announced, we would still be continuing to work on the old ones. So I think that -- we believe that we'll continue to have significant M&A revenues at least for the next couple of quarters.

Okay. Excellent. Thanks a lot.

And our next question today comes from Colin Gillis with Adams Harkness. Please go ahead, sir.

Hi, Jim. Hi, Phil. It's a pleasure to join the call at such a nice quarter.

Thank you.

Could you just talk a little bit about the trinity of organic growth and consolidation? And do you view that 10 percent organic growth number, is that close to the upper end or a reasonable rate to add staff? And also if there's anything you can talk about in terms of the senior/junior mix and where the hires are coming from?

Okay, first in terms of the target, we planned a target because it effects recruiting, space planning, and the allocation of resources for recruiting. And we believe that we can sustain 10 percent and that we will have the demand to justify that. In reality, over the course of the year, if demand continues to increase, we'll step up the recruiting activity that could result in a higher increase. And we also are always interviewing at senior levels opportunistically and that could also result in spurts in hiring.

So the 10 percent is by no means a cap. It could certainly be higher. I can't really provide you what the higher end of the range would be. But certainly it would not be -- it certainly wouldn't be infeasible to grow 15 or 20 percent if the demand were there. This is something that we try to react to over the course of the year. We are planning to be very careful about not overhiring and having that result in the dropping of utilization. We currently are still focused on keeping utilization rising as opposed to just hiring head count for the sake of head count.

Let me add to that. Brett, the -- there's -- at the Corporate level I wouldn't say that there's a particular target for junior and senior, although that corporate target is consistent with a very detail ad amount about it's 5 practices. In 1 or 2 practices we believe that they are underleveraged so we might be trying to increase the leverage, which means filling in with more junior staff.

In a couple of areas, particularly where there is new growth being challenged to the practice, you need to start by hiring senior people and then fill in at the junior practice level as the demand materializes. We find that it is reasonably easy to fill in at the junior levels. The key as always has been to find good, senior rainmakers. We have been -- we were quite successful last year. And we continue to focus on that aspect of it.

If utilization continues to increase, one thing that is likely to happen, is that we would do more junior hiring as the staffing got tight. Junior hiring can happen with a relatively quick turnaround. So it is all very demand dependent. If the demand is there, the head count will grow, and the leverage ratio in junior/senior will rise.

Okay. Great. And just as a follow-up could you talk a little bit about how the drag in billing capacity related to the holidays or for the overseas business how that tracked against your expectations?

The amount of fringe time was a little bit less than would be normal. And I think that is also a function of the strength of demand because when people are busy they'll take fewer holiday-type days. So we did have a drop in fringe time. The other factor is that in this -- in the Q1 of this quarter, both Christmas and New Year's fell on a 3-day weekend. It tends to be less fringe taken when that's the case then when those holidays are in the middle of the week. So the combination I think of a strong demand plus the timing of when the holidays hit resulted in less fringe time being taken.

Okay. Great. And just finally regarding head count and the CMP practice, have any of the junior staff been repurposed into other areas? [indiscernible] when I see going forward. And could you talk about whatever terms are appropriate, your Middle East expectations that are assumed in the guidance range?

We don't generally -- we don't normally transfer stuff. But we do move people to where the work is. So we do try to move people to where the strength and demand is. That's not always possible obviously. Somebody does CMP work in London is not going to be very helpful on a finance case in Los Angeles, except in rare circumstances. So we do try to move people to where the work is as much as possible.

In terms of the Middle East, we do have opportunities for increased work there whether we will be able to achieve them is really a function of the continued security situation and also the turnaround time in terms of getting new assignments from clients. But we do have activities going on there right now.

And I -- Brett, or -- I do want to add that business in the -- for chemicals and petroleum practice in both North America and Europe were up. There was organic growth there. And there is the ability for people to be fungible between work and different parts of the world for the same practice and the same kinds of activities, like performance improvement shareholder valuation, and so on.

Okay. Great. Thank you.

And we will now move on to Next Generation Equity Research's, Patrick Elgrably for our next question. Please go ahead.

Hey, good morning, guys. And congratulations on a spectacular quarter.

Thanks, Patrick.

A follow-up to the prior question, can you talk about the overseas impact on utilization, particularly the Saudi chemicals and petroleum practice? I believe last quarter you said it negatively impacted the overall number by 1 or 2 percent. Can you quantify that for this quarter? I guess what I'm getting at is, were the consultants fully deployed in that area?

Why don't we check some figures here and we'll get back to you in this call on that Patrick.

Okay. And then in terms of turnover during the quarter what were the numbers at the junior and senior levels?

I don't have the specific turnover numbers here, but they were -- well, just a moment.

And while you're looking for that, I don't know if you also have available the billing rate numbers also for the junior and senior levels?

Turnover in the quarter was about 3.4 percent. I am advised here. We don't provide billing rates differentiated by levels. As you know -- I mean, I can see a model out there. And I would like to be able to give that to you. We have indicated that our average, weighted-average bill rate is of the order of about $310 per hour. And our revenue per consultant including -- well, we have not updated that calculation for this quarter. As we reported last quarter was of the order of $476,000 per consultant per year.

Okay. Thanks a lot.

[OPERATOR INSTRUCTIONS]. And we will now hear our next question from Sandra Notardonato from Robert Baird. Please go ahead.

Thank you. Can we start with the comment that you made about New Zealand, what exactly was happening there that caused (C) tax rate to pick up a little bit?

Essentially it was the need to establish valuation allowance based on an operating loss in New Zealand that we don't believe will be there on a continuing basis.

Okay. How much does New Zealand represent as a percentage of the non-U.S. revenue? Is it a small percentage?

Yes, it is.

It's a very small percentage.

Okay. Also utilization, do you have that breakout U.S. versus non-U.S.?

We don't break it out, but U.S. utilization was above the average for the quarter. The non-U.S. was below. Non-U.S. tends to run 10 to 15, sometimes 20 percent below the U.S. number.

Okay. So if you looked at -- if you took into account -- I think this is somewhat of a follow-up to Colin's question. If you look at the demand in the quarter and the fact that you had the holiday season to deal with, what do you think that on a steady state basis in the quarter could have delivered in terms of utilization? Would it have been at the higher end of the target of 80 to 85? Or should I not be looking at it that way?

That's just very hard to know because it does tend to be a little bit of a sag in utilization in Q1. But the bigger impact on our revenues and profits tends to be on the availability of ours. It is basically there are 2 weeks they are offering it as almost black holes in terms of supply and labor out of a 12-week quarter. And we define utilization on an available hours basis. So if the entire Company took 2 weeks of vacation that in itself might not affect utilization, but it certainly would effect our revenues and profits. So the bigger effect -- the bigger quarterly effect tends to be the number of hours that are available to work. However, there usually is some sag in utilization that didn't happen in this quarter. It is reasonable to expect that without -- if it hadn't been a holiday quarter, there might have been some increase in utilization above the 80. But I can't really quantify that.

Is that the way we should be looking at the first quarter -- the following quarter then that we could see utilization up above the 80 percent? Since the hiring really wasn't -- hiring really wasn't a big number?

It is just hard to know at this stage. We're just beginning of the quarter. And it is hard to project utilization to the nearest 1 percent. Just because it tends to go up and down a bit drastically. But it wouldn't surprise me to be a little bit above 80 percent. But I would hesitate to forecast that.

Okay.

Let me -- if I can interject, Sandy, -- I think as -- I think it may have been Patrick's question that the we had indicated in the last quarter that the Middle East impact on utilization had been about a 1.5 percent drop from what it otherwise would have been if we simply excluded that. This quarter, it is about 1.25 percent. We have been able to get some people back into the Middle East. And as before we believe we have backlog that we can work off as the -- our perception of safety improves. We do have people willing to go back there. It's more we've made a Corporate decision to be extraordinarily careful about it.

Okay. The next topic is along the lines of the new hires. Can you tell me what areas of expertise the new hires have been hired for and also if you can let me know if the rate at which you're hiring folks is actually increasing in terms of what you're paying them? Are you having to pay them sign-on bonuses, et cetera?

Well, the hiring has been across a fairly broad spectrum of our activities both practice and geographically. So I don't know if there's any particular unusual concentration. Although, we are probably expanding a little bit more rapidly in the finance are because of the continued strength and demand there. In terms of our compensation structures, we have not had any unusual changes. The market is getting tighter. But we have not had any situations with any pay large signing bonuses.

Okay. Just a couple more questions. It was mentioned on the call earlier that you might be in need of more staff. Some more junior staff in particular areas, as well as the potential to hire senior professionals in practice areas that you're trying to get into. Can you give a little detail around which areas you need more junior people versus the areas that you would like to put senior people in?

We are actually getting fairly tight in terms of junior staff availability. And most of our major locations in the country -- in the Company, that's more of a locational thing than anything else because the junior staff can [indiscernible] where the businesses is.

So in most of our U.S. operations, for example, are operating at high utilizations at that level. And we're at a stage now where we would have to start bringing in more people if it got any tighter. And that's sort of a corporate-wide situation. Now, I'm excluding for that purpose, London, for example, which is not in that situation. But pretty much everywhere else in the Company. We're in a situation where if there is much more increase in demand we would have to bring in more junior people.

Sandy, by the way, the answer to your prior question about New Zealand is that it is about -- it's less than 1 percent of CRA's revenue for the quarter. And it's about 6 percent of all of our non-U.S. revenue.

Okay. Thank you. If we can just go back to the comment that you just made, Jim, around the junior staff, what kind of utilization is the junior staff operating at? And what is the plan in terms of when you would be bringing on some new people? I think you said around the late summer, early Fall. How many people do you think you'll be adding at that time?

I don't have a specific number. But the -- when we're busy analysts and associates tend to be operating at pretty close to 100 percent utilization, which is not a cap. Because utilization is basically determined on a 40-hour work week, and people when they're busy often work much more than 40 hours a week. So it's possible to operate on sustain basis above 100 percent. However, if it goes very much above 100 corporate wide for very long it's going to create localized burnout situations. So once we get into that 100 percent range we're at a stage where if it rises much more we have to hire. And we're pretty close to that range today.

One other factor in that, Sandy, is that we have an excellent practice of moving the work to where the people are as opposed to putting people on airplanes, although that does happen occasionally. A couple years we did a study in which we found that 40 percent of our revenue is accrued in offices different from where the business was sold or sourced. So that we again looking at things on a geographic basis is a very secondary way of looking. We manage our practices on a global basis.

Okay. The comment on acquisitions or the follow-up question on acquisitions. When you're looking at new companies, you said you have a couple that you've been talking to for some time. Would they be getting you into new areas or are they -- acquisitions that would potentially augment your current expertise?

No, we're focusing pretty exclusively on areas where we are currently operating, but would like a little bit more size or geographic presence. So this is based -- these would be modest acquisitions that would strengthen an existing operation.

Okay. And then on the DSO front, how many of the days were a function of the acquisitions that you made versus the Legacy Charles River Business?

I can't break it out that way. But as you noticed or I hope heard from my report are the billed receivables days actually dropped whereas the unbilled days went up. Some of that is a function of the meshing of billing processes between operations.

When we do acquisitions as we did on November 12th and November 18th, or 19th, depending on what part of the world you look at the date, by -- and our period, our accounting period ended on November 27th, we have to have our billing in shape. So it gets -- it is a little ragged. And we -- it takes probably a full quarter until the processes are meshing perfectly. So I think during that time, there probably were lags, but I don't have a specific metric. We do know that there were lags in both TCA and NECG in getting the bills out. And at least the kind of performance we have out at CRA, not that CRAs couldn't be improved also.

Okay. Perfect. Thank you very much.

And at this time we have one question remaining in the queue. And that is a follow-up question from Jim Janesky from Ryan Beck & Company. Please go ahead.

Yes. My follow-up question has to do with NeuCo. First, there has been a lot of activity from the Bush Administration on coal generating facilities and bringing down the pollutant levels of various emissions. What are your thoughts? Or what do you think that could do for NeuCo over the next year? Are you seeing increased activity on proposals?

We love that initiative Patrick. NeuCo has has a very full platter of opportunities and some of which could be quite significant. But again these are very lumpy transactions. So it is hard to predict what is going to happen. But NeuCo does have no shortage right now of potential customers to whom they are talking and to who have expressed strong interests. And certainly having the Government more aggressively enforcing environmental regulations would be a big plus, that's the major driver for NeuCo. The NeuCo combustion [indiscernible] product generates a good return just on dollars and cents. But if the utilities are also underpressure and they need to meet environmental standards then it also has significant benefits there.

Okay. And then getting back to the patent infringement -- that is a type of work that your Company does consulting on. What would you say if NeuCo were to lose the range of judgments have bend for that type of patent infringement cases?

First of all, Jim, you understand that counsel for NeuCo is assessing a lawsuit, which I think was presented 2 days ago. Since this is recently filed litigation we really should not comment further at this time. But I'll also mention that while -- certainly patent litigation is a practice in which we are schooled. We obviously can't work in that area; at least formally, to form to develop assessments in that area. We would not be [indiscernible] objective.

Sure. Okay. Thank you.

And at this time, gentleman, there are no further questions in the queue. I would like to turn the call back over to you for any additional or closing remarks.

Well, thank you, everybody. We look forward to speaking with you in our second quarter conference call. This concludes today's call.

Thank you, everyone for your anticipation. That does conclude today's conference. And at this time you may now disconnect.