CRA International Inc (CRAI) 2005 Q2 法說會逐字稿

Good day and welcome everyone to the CRA International second quarter of fiscal 2005 conference call. Today's call is being recorded. You may listen to the webcast on CRA's web site located at www.crai.com.

In addition to 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 and introductions, I would like to turn the call over to Mr. Cooper. Please go ahead, sir.

Thank you, Christina. 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, June 9, 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, risks inherent in international operations, intense competition, the integration of acquisitions, our ability to complete acquisitions of the former Lexecon Ltd. consulting business, NeuCo's performance, changes in accounting standards, rules and regulations, the potential loss of clients 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.

2005 marks CRA's 40th year of operations. Over the course of those 40 years, we have grown from a small company and the banks of the Charles River in Boston to a truly global consulting organization with more than 600 consultants in 23 offices on four continents. We've expanded are client base and global footprint, and broadened our expertise to cover a wide range of major functional and vertical disciplines.

As a result, reflecting our expanded scope of operations we recently changed our name to CRA International Inc. Despite the name change, CRA's commitment to its clients remains unchanged. To provide top-quality consulting, unsurpassed analytic skills, and pragmatic business insights through an interdisciplinary team approach.

These traits have been reflected in the continued growth of our business over the years. We have raised the bar in terms of financial performance that we have achieved at this point in the fiscal year. After posting better than anticipated financial results in Q1, our positive momentum extended into the second quarter. Revenue grew nearly 48% to $67.4 million, a record Q2 level.

Net income increased to $5.5 million, up 36% from the second quarter a year ago, and earnings per diluted share increased to $0.49, up nearly 29% from a year ago, reflecting share count growth of approximately 5%. Organic growth, excluding acquisitions and NeuCo, was nearly 21%, compared to Q2 of last year, reflecting the continued strong growth in demand for our services. Staff utilization was 81%.

During the second quarter, four of CRA's five largest practices enjoyed considerable growth, and I'll cover these briefly within the context of the greater litigation in business consulting segments. Our litigation revenues grew more than 80% over Q2 of last year. This growth is a function of continued strength and demand, particularly in financial litigation, and a lesser extent M&A, as well as the impact of our fiscal 2004 acquisition of InteCap.

Our competition practice grew more than 40%, about half of which was organic growth. The M&A component of the competition practice grew more than 200% from Q2 of a year ago, and accounted for about 7% of the Company's total second quarter revenue. This compares with approximately 3.5 % of total revenue for Q2 last year.

M&A revenue, however was down on a sequential basis. We believe the sequential decrease was simply a timing issue that reflects the winding down of a large project early in the quarter. General litigation work, particularly in the regulatory area, remained strong in Q2. Some noteworthy examples of our work in the competition in practice, include working on behalf of the merging parties in the Sprint, Nextel and P&G GIllette mergers, providing expert testimony on behalf of Evanston Northwestern Health Care, and the litigated FTC challenge to its already consummated merger with Highland Park Hospital.

Filing expert report in Australian Competition and Consumer Commission proceedings on Telstra's undertakings on prices, and working for the NFL an antitrust suit brought by Hamilton County, Ohio alleging that the Cincinnati Bengals and the NFL restrict the number of franchises in order to exercise monopoly power against owners and stadiums.

Our finance related litigation practice reported 70% growth in Q2, organic growth of this practice was 40% compared to last year. Large securities-related litigation cases continue to fuel our growth. Revenue in our intellectual property practice grew nearly five-fold from Q2 last year which is directly related to acquisition of InteCap at the end of Q2, fiscal 2004. The third quarter of fiscal 2005 will be the first quarter for which a purely apples to apples comparison of current and prior year quarter IP revenues can be made as InteCap is now surpassed the one-year mark of part of CRA.

Turning to business consulting, overall revenue increased approximately 11% in Q2, driven by the energy and environment practice of capital projects work. Some of CRA's smaller business consulting practices, aerospace and defense, metals and materials, pharmaceuticals and transportation, grew in Q2 while others experience modest declines.

Our energy and environment practice grew nearly 21% year-over-year in Q2, driven by ongoing engagements for major E and E clients such as Merant, and Enron as well as work for the Federal Energy Regulatory Commission's various rule makings related to comparative electricity markets, and incremental billings from the TCA staff we acquired the end of fiscal 2004. During Q2, of this year CRA completed a large study for the Southeast Power Pool, on the costs and benefits of performing a regional transmission organization. We anticipate follow-on work relating to this project to continue in Q3.

Revenues of the C&P practice were 5% lower compared to Q2 in the prior-year period. However, on a sequential basis, C&P revenue increased more than $1.6 million, or 31% from the first quarter of this year, as a result of substantial increased revenues in the Middle East, and significant growth in the non Middle East component of our London-based practice.

Increased revenue from the Middle East accounted for about 70% of the increase in C&P revenues, and includes business strategy work in Saudi Arabia, Jordan and Kuwait. Despite the ongoing security concerns in the region, we have been able to get our consultants back to work in the area and boost billings. Examples of work generated in the London office include supporting the evaluation of a major oil company transaction, leading a chemical major's strategy for entry to the markets in China, helping P&G obtain the necessary regulatory clearances for its merger with Gillette.

And this work is taking place on both sides of the Atlantic, and supporting private equity interest in the acquisition of the LPG space we anticipate generating significant second half fees. While one quarter doesn't make a trend, we believe our second quarter performance may be an indicator that business will continue to pick up in the Middle East and the UK as a whole. About 25% of the increase in the C&P revenues is related to improved performance in CRA's non-Middle East core staff in London, an office that had been operated for the past several quarters before the potential we foresaw.

The improvement is a result of both command growth and some key organic headcount additions. Is an important to note, however that this does not include the impact of the Lee & Allen acquisition that we completed only 2.5 weeks from quarter-end of Q2 in this year. I will talk more about our acquisition activity in a moment

Our other international offices performed well in the second quarter, enabling us to a lower our effective tax rate, by eliminating some overseas operating losses, for which we received no tax benefit on our consolidated financial. Phil will cover this shortly. Overall, revenue recorded by our non-U.S. subsidiaries represented approximately 14% of total revenue in Q2, compared with 13% in Q1 and 12% in Q2 of last year.

In addition to the improvements in London, this growth outside the U.S. also reflects the acquisition of NECG in Q4 of fiscal 2004, which expanded our presence in Asia Pacific market. As we have said on previous calls, our primary non-U.S. focus now is on expanding our penetration in Continental Europe.

We made significant progress on these objectives recently with the acquisition of Lee & Allen. The acquisition of London-based Lee & Allen, which we purchased for cash and stock totaling approximately $16 million U.S. and enables us both to penetrate further the growing European and Asia Pacific consulting markets, and to expand our functional expertise in forensic accounting, a rapidly growing consulting area.

Lee & Allen's staff of approximately 40 consultants are among the most well-regarded in Europe, and have a presence in Asia through their Hong Kong office. We believe this acquisition will enable CRA to cross-sell additional consulting work to Lee & Allen's clients in our core areas of expertise and vice versa.

In mid-May we announced the anticipated acquisition of the economic litigation consulting firm formerly known as Lexecon, Ltd. This firm is a leading provider of competition economics in Europe and is not affiliated in any way with Lexecon, Inc. in the United States, or its parent company, SCI Consulting.

Competition economics is one of CRA's core competencies. Adding a staff of about 30 consultants and a base of operation in Europe for this discipline, will further enable CRA to penetrate the Continent and introduce us into South Africa where the firm has a strong foothold. We expect this acquisition to close in the near future.

Looking at headcount, CRA added nine new consultants in Q2, in addition to the 43 Lee & Allen staff, bringing total professional staff to 614. This excludes the professional staff of approximately 30 we expect to bring on board as part of the acquisition of the former Lexecon, Ltd. business.

Year-to-date we've had organic head count growth of approximately 9% on a year-over-year basis. Our business plan and guidance calls for approximately 10% headcount growth in fiscal 2004. As we stated last quarter, the increase will be skewed toward the last two quarters of the year, as staff come on board during the summer following graduation. There will be a significant number of new staff additions in Q3. We are continuing to actively recruit at all levels, and we believe that we will exceed our 10% planning target for the year.

Turning now to our NeuCo subsidiary, revenue increased to $1.9 million in Q2 from $1.8 million in Q2 of last year, and up from $1.4 million sequentially in Q1 of this year. Revenue this quarter included an approximate contribution of $478,000 from the DOE contract.

NeuCo's net income was de minimus in Q2 at around 1% of revenue, compared with net income of approximately $200,000 a year ago. We continue to anticipate quarter to quarter volatility in NeuCo's results. Based on projects in hand and expected new work, NeuCo is projecting revenues for the second half of the year to be above the first half.

Before I turn the call over to Phil, I would like to comment on an organizational change that was announced this morning. Phil Cooper has been promoted to Vice Chairman and Executive Vice President. In his new role, in addition to continuing to manage CRA's corporate development function, Phil is now responsible for the integration of acquisitions and group buyers, in cooperation with CRA's Group Vice-Presidents.

Phil will also help practice leaders meet growth and profitability targets, and evaluate investments and practices in offices. The functional heads of Marketing, Corporate Development, Legal, and Human Resources will report to Phil. The breadth and depth of Phil's experience, and his track record since coming to CRA make him superbly qualified for this role.

Wayne Mackey will be joining CRA in early July to succeed Phil as CFO. Wayne is a 30 year veteran of Arthur Andersen, who led Arthur Andersen's Boston office technology practice for a number of years. Mackey's strong background in corporate financial management will benefit CRA as we continue to expand our business. In addition, the expansion of our executive management team will give us a critical mass to deal with the challenges we face, and the opportunities available to us now as a truly global consulting organization.

I am excited to be working with Phil in his increased role, and I'm looking forward to having Wayne join team. With that I will turn the call over to Phil for the financial review.

Thanks Jim.

As always, I'd like to remind you that CRA's fiscal year operates on 13 4 week cycles, producing quarters unequal in length. Q2, Q4 and Q1 are typically 12 weeks each, while Q3 is a 16 week quarter. Briefly, recapping our results, Q2 revenue, as Jim said, increased 48% to $67.4 million. This includes only a minor contribution from Lee & Allen, which we acquired very late in the quarter.

Second quarter gross margin decreased 129 basis points to 40.5%. This was a result of the increase in consulting work sourced internally by CRA employee consultants, following the acquisition of InteCap late in Q2 last year, higher NeuCo costs, and higher CRA junior staff labor costs. Reimbursable expenses were 11.9% revenue, compared with 13.9% of revenue for Q2 of 2004.

Total consultant utilization in Q2 was 81%, up a full percentage point from the 80% reported in Q1, and consistent with the comparable period a year ago. Maintaining year-over-year utilization in the second quarter is a notable accomplishment considering our high level of acquisition activity in the past year and the related integration requirements.

Second quarter operating margin was 15.4%, compared with 14.8% in the second quarter of fiscal 2004, and 14.6% in the first quarter of this year. This marked only the second quarter since fiscal 2001 that we have achieved operating margins greater than 15%, and our long-term goal is to maintain operating margins above this level.

Q2 SG&A expenses were 25.1% of total revenue, compared with 27% of revenue in Q2 last year, and 25.6 % of revenue in Q1 of this year. CRA's tax rate decreased to 44% for the second quarter at the low end of our guidance range of 44 to 45%. The reason for the decrease is the turnaround in our overseas operations that Jim outlined earlier, additional improvement in our overseas operations and the impact of the Lee & Allen and expected Lexecon, Ltd. acquisitions, may further lower our effective rate in future quarters. We continue to work on identifying ways to capitalize on these opportunities.

During the second quarter, we incurred a GAAP-related foreign exchange loss of approximately 158,000 versus a loss of about 55,000 for Q1. We are adversely impacted this quarter by currency movement associated with our acquisition of Lee & Allen, and billing certain clients in currencies other than the functional currency of the office billing the work. We continue to mitigate our foreign-exchange exposure to frequent settling of inter-company account balances, and by self-hedging our foreign dollar position.

The second quarter of fiscal 2005 net income grew 36% year-over-year, to $5.5 million, or $0.49 per diluted share. Share count used to calculate Q2 earnings per share was up to 11.2 million compared with 10.7 million shares outstanding in Q2 of fiscal 2004. Approximately 400,000 shares included in the calculation for Q2 fiscal 2005 based on the average share price in that quarter of $48.78 were due to dilution from CRA's convertible bond offering. This average price, by exceeding the conversion price of $40, lowered Q2 EPS by just under $0.02.

Our current breakdown of staff is 195 junior consultants and 419 senior consultants, which includes the Lee & Allen staff. As Jim mentioned, we continue to expect net organic head count additions of greater than 10% over fiscal 2004 levels.

Looking at the balance sheet, billed and unbilled receivables increased to $92.5 million compared with $78.7 million at the end of Q1. Current liabilities was $61.2 million at the end of Q2, compared with 61.9 million at the end of Q1. Total DSOs were 108 days in Q2, up from the Q1 level of 103 days. This consists of 38 days of unbilleds and 70 days of billeds in Q1 compared with 41 days of unbilleds and 62 days of billeds in the sequential first quarter.

The increase in DSOs reflect the process of change implementing new billing and collection procedures associated with the recent acquisition. However, we are pleased with the reduction of the unbilled component. A reason for the increase in the bill component of DSOs is that with the recent acquisition there has been a small business mix shift to toward litigation business at CRA. DSOs within litigation consulting are higher because so much of the billing is funneled indirectly through our attorney's channel, to our ultimate clients.

Of course the other obvious reason is that the immediate very short run consequence of lowering unbilled DSOs is an increase in accounts receivable, and accordingly higher DSOs for the bill component. Although we continue to target total DSOs to be lower than 100 days, we are pleased that the aging distribution of our accounts receivable has improved quarter to quarter.

Cash and equivalents and short-term investments sit at $51.7 million at the end of Q2, down from $73.7 million at the end of Q1. Net cash used in operations in Q2 was $8.3 million, reflecting the pay out of nearly all FY '04 officer bonuses in this quarter. Depreciation and amortization expense was approximately $1.6 million flat when compared with sequential first quarter.

As you know, the SEC has postponed till fiscal 2006 the required implementation of FAS 123R and 148, relating to accounting for stock based compensation. The new method requires the estimated fair value of the options to be amortized over the options' respective vesting periods. CRA had previously given guidance that there would be a negative impact of approximately $0.04 per share in Q4 of fiscal '05, with the postponement of the FASB implementation until Q1 of fiscal '06.

This impact will no longer be reflected in Q4 of this year. The higher average stock price observed so far in Q3 is continued above the Q2 figure of $48.78, could offset this gain by generating a further increase in the fully diluted share count because of our in-the-money existing stock options and convertible bonds.

Before I turn the call back to Jim there a couple of additional points I would like to cover. First, with regard to the acquisition of Lee & Allen, and the expected acquisition of the former Lexecon, Ltd. business. We expected two acquisitions, in total, to be accretive in the range of $0.15 to $0.20 per year going forward, but for the first whole year we expect that number to be closer to $0.15.

This reflects the integration costs and revising their existing client contracts so they are structured more in typical CRA fashion and consistent with the needs of GAAP revenue recognition guidance. Second, as we announced recently during the second quarter, our closing stock price exceeded $50 for at least 20 of the last 30 consecutive trading days in the quarter.

In accordance with the terms of the indenture governing our 2.875 convertible debentures, the market price conversion trigger, the so-called cocoa trigger has been satisfied, and the debentures are convertible throughout CRA's third fiscal quarter ending September 2, 2005. This test will be repeated each quarter.

As we stated at the time and as we still maintain, given that the current market value of the debenture substantially exceeds the parity or conversion value, we believe a significant percentage of conversion is highly unlikely at this time. For example, when the stock price had recently traded at about $57 per share last week, the bonds were trading at about 157.50 and the parity value was 142.50, versus 100 at par.

This $15 premium, per $100 of par value, which would be realized by the institutional holders of our bonds by selling the bonds at market, certainly discourages conversion. Third, on June 6, 2005 CRA received a commitment letter from Citizens Bank to expand our existing line of credit from 40 million to $90 million. The incremental costs will be about $99,000 per year over two years. The expanded facility will allow us to mitigate the limited potential liquidity risk upon conversion, and continue, allowing us to continue to classify up to $90 million of our convertible bonds as long term rather than short-term. This credit facility reassures us of our continued ability to meet any unforeseen financial commitment.

Lastly, with regard to quarterly seasonal EPS swings, that I want to remind you that our current size, our quarterly EPS generally fluctuates according to the following pattern, Q2 EPS is positively affected. Now by about $0.04 above norm, as result of low holiday and vacation time during that quarter. While Q3 EPS is negatively affected by the same $0.04 per share below normal as result of the greater amount of fringe time taken in summer months. In fact, this deviation from norm in Q3 may be exacerbated by our higher head count in the UK.

Corresponding effects in Q4 are positive $0.03 per share, and in Q1, negative $0.03 per share. Please keep this model in mind when calculating quarterly EPS for the remainder of CRA's fiscal year. Although I do caution that a typical seasonal pattern may shift overtime or be offset by other factors, such as major headcount changes and or share count variations.

Now back to Jim.

Thanks Bill.

We believe the fundamental business trends in the markets we serve will provide sustainable demand for our consulting services for the remainder of fiscal 2005 and for the foreseeable future. As a result, we're positively updating our guidance provided last quarter.

Excluding the anticipated acquisition of Lexecon, Ltd., we now expect revenue and earnings per share growth of 35 to 40%, compared with prior guidance of 30 to 35% for FY '05. We expect growth of 40 to 45% in income from operations, and that income, compared with prior guidance of 30 to 35%. We're not changing our guidance utilization for the full year of 78 to 80%, but we are now focusing on 80% as a realistic target for the year.

We also continue to believe that our effective tax rate will be in the 44 to 45% range or perhaps in the lower end of that range. In order to estimate potential share dilution for EPS guidance, we utilize the stock price of $55.50 that was the average closing price of the ten trading days ending on June 8. Deviations from this price will cause our earnings per share to vary based on the amount of share dilution from our convertible bond offering. We anticipate continuing to use this ten day trading approach in providing EPS guidance going forward.

With that I would ask the operator to open the call for questions. Operator.

Thank you. [OPERATOR INSTRUCTIONS]. We'll take our first question from Jim Janesky with Ryan Beck & Co.

Yes. Good morning. Jim, you mentioned about some large projects in the M&A part of your operations winding down towards the end of the quarter, I believe. Have you been able to replace that business and are you seeing any slowdown in the M&A market?

No. We think that's just a timing issue. Activity continues to be strong in that area.

Okay. You give a lot of detail in your prepared remarks about growth rates of the various segments of your business, if you could rate the top three growth drivers of the business throughout 2005, what would they be?

Well, we continue to have strong growth in in the finance area. That's being driven by Securities' actions, and the continuation of the types of large cases we've worked on in the past involving large corporate frauds. The M&A business continues to be strong. Our overall litigation business continues to be strong. We have had sort of continuing activity in terms of new projects coming in. We've also seen a turnaround, a turnaround in some of our business consulting practices. There has been quite a lot of additional work and leads coming in from the Middle East, and other work in the international C&P sector.

Okay. And Phil, you mentioned about labor costs in the quarter, with respect to gross margins, are you finding that there is -- that salary that you are having to offer going up, or was that just an increase because the amount of hiring you did this year versus last year?

Actually I referred to junior labor costs, Jim. Part of, one of the things we look at when we integrate businesses is to make sure that we have cross equity throughout the firm, and in fact, there's a difference in the structure of labor costs between InteCap when we brought them in, and between legacy CRA, and we wound up increasing the labor costs of the legacy CRA component to match InteCap. Overall, this is not something that we see is a trend going forward.

Thanks for clearing that up. And a final question. The $0.15 accretion -- was that for both Lee & Allen and Lexecon combined?

Yes. It is for them combined.

Okay. Thank you.

Thanks, Jim.

Up next, we'll hear from Matt Litfin with William Blair and Company.

First, congratulations to you Phil. I noticed this morning the stock has quadrupled since you took over as CFO, so Mr. Mackey has big shoes to fill here.

Thank you.

I guess the first part of my question has to do with the overall industry environment. Given comments from another publicly traded consulting firm yesterday, and then contrasting that to your Q2 and the robust guidance from you guys today, I thought it might be helpful to get your thoughts on industry demand trends just over the past weeks, as you've seen that play out post quarter, and also what do what you see industry-wise through the balance of the year, maybe in your particular segment of the consulting industry?

Maybe I should comment on that. I think I'm aware of what you're referring to. We really don't compete as far as I can tell in the same markets as the other firm. At least, we don't see them very often head-to-head and from what I know of their activities, they are really providing different services for different kinds of clients.

I would say in the area of business that we operate in, the markets are very very strong. We haven't seen any change in that trend or any slowdown in business coming in. In fact, it continued to come under very strong pace. I would say that is pretty much across the board in all our businesses.

Okay. Just to follow up if I could, and this has to do more with the UK situation. The $0.15 accretion from the two U.K. acquisitions, is it safe to say that you are fairly evenly split between the two?

They are both roughly equal size operations. I'm not sure if we're prepared to give a breakdown, but you could judge something from that.

The reason we group them together, Matt, is because there are lots of variables and some can go one way for one of the firms and other ways for the others. At the same time, as you know, we haven't given full metrics for the former Lexecon, Ltd. acquisition because we haven't completed that acquisition yet. Although, we really expect to do so in the very near future.

Remind us as to why the Europe and the U.K., specifically, does look attractive to you now? What the opportunities are there longer-term?

Well, there are several things, several thoughts that we have. The first is the competition of regulatory related conflict resolution market in Europe or particularly the U.K. is strong and is growing, and there is an increase in demand for services that would cross the Atlantic.

For example, on the P&G Gillette merger, we're working on both sides of the Atlantic. So it's very important for us to have a strong London office, and London is basically an entree point into Europe. London is the strongest market for that kind of business in Europe, and the other place to be is in Brussels, and we're in Brussels, which is a basically branch office from our London office.

In addition, of course there's the common language, and similar ways of doing business, even though their legal systems are a little different. So we think that is a very natural place for us to be. On the business consulting side, again we serve international multinational companies. We really need to have a presence in Europe as well as Asia Pacific to provide a full set of services.

Again London is the natural location for that, and historically we have been servicing Middle East out of London. We have a strong C & P, or Chemical and Petroleum consulting practice, so it's a natural for us to look at the Middle East as a source of some of the revenues for that.

Matt, I would add that we're often told that we got engagements because of the capability to span the Atlantic, and in fact, I think, strategically, that international capability is much more important to CRA then simply the direct revenues that we see overseas.

Great. Thank you.

And from Piper Jaffray, we will hear from Brett Manderfeld.

Good morning, gentlemen, and my congratulations to you, Phil, as well. Is it fair to assume that the two acquisitions, Lexecon and Lee & Allen, have pretty similar bill rates and marketing structures to the core business, or is there opportunity to make adjustments to there?

I don't think that this is perhaps the right forum to be announcing to future clients that we're about to raise their rates, because in fact, the first we've learned in doing acquisitions and integrating them successfully, we don't sort of go in and start changing everything they do.

But I think that it is fair to say that for the most part, our rates tend to be higher than the smaller private companies that we have been doing, and bringing in as tuck-in acquisitions. There may be an opportunity there. That's not heavily factored into our own evaluation of the attractiveness of each of these acquisitions.

Okay. Very good. In terms of the shelf registration. I'm not sure if you can or are willing to comment, but I guess, one, would you do a secondary offering if there was no big acquisition that was imminent, and then two, and I'm talking about primary shares there, and then in terms of the secondary shares, would you do a deal to just clean up the consultants even without increasing primary shares? Thanks.

Okay. Let me try and answer. If I miss what of the two sides of your question please come back. We have filed a shelf registration, which of course gives us flexibility for some time going forward. I think it's fair to say that we are always evaluating our opportunities and looking at various alternatives for capital raises.

We have taken advantage of some of those opportunities in the past, with the capital equity rates in 2003 and a convertible bond rate in 2004, both which were very successful. We're going to continue to evaluate the situation. In the meantime, we just continue to review the alternatives.

In terms of, just, if you decide not to raise primary shares, Phil, would the -- I think it was a million shares that you filed in the shelf with the secondary, would you do a secondary offering just to clean up the consultants, or do they have the opportunity to sell in the open market? Thanks.

Okay well, it is more than just the consultants involved, there's essentially the pre-IPO shareholders, as you know, from the 1998 IPO, there were restrictions on those shareholders from selling that relaxed in various traunches in 1999 and 2003 and 2005 and in 2007. There are, of the pre-IPO shareholders, the shares at that time there were about 30% sell-restricted with 20% coming unrestricted approximately in April, and it's past April.. We reviewed those alternatives too .

Operator.

Yes. [OPERATOR INSTRUCTIONS]. From Adams Harkness we'll hear from Colin Gillis.

First off, congratulations on another strong quarter everyone. I was wondering if you could give us some color about when did the discussion start with Lee & Allen, and Lexecon, and do you still see prices inching upwards for targets, and are there still prospects in the pipe?

Okay. With respect to Lee & Allen I would say that started in -- somewhere in the spring of 2004 but I may be off a season. It actually came out of a search we were conducting with one of the international search firms for a major rainmaker, and we found one of Lee & Allen, and instead that turned into an acquisition possibility, and we were in active discussion until we closed on April 27 of this year.

In the case of the former Lexecon, Ltd., we probably have had discussions with them, on and off over a five-year time frame. We have always agreed to continue talking, and the discussions in those heated up in the late winter of 2004-5, basically in February and March of this year, and we came to an agreement on a signed exclusive term sheet as we had announced earlier in mid-May, pretty well on the day that that their license to use the name Lexecon expired.

We don't, it's hard to say that prices are falling, but as some of the better focus consulting groups see others spent getting acquired, and actually prices are going to inch up a bit. We are very very diligent in not overpaying, and we sort of watched the metrics with respect to revenue, and EBITDA. We also, of course, have a component of every acquisition that is based upon additional purchase consideration based upon future results, so that there is aligned incentives, so that we both get what we're looking for.

Okay. That's great, so they follow the same track, historically, where you spend a considerable amount of time with talking with prospects?

Absolutely. This is not something we rushed into.

Is there any way that you could quantify what you might think about the utilization differences between Europe and the United States for the month of August and December?

I don't think we're prepared to quantify it, but Europe utilization has been tracking lower than the United States, but improving -- the differentials been dropping recently.

Should we expect the differential widens in those two months? I know you did great color about how we should be thinking of the seasonality in the quarters but I'm trying to get a sense --

The way we measure utilization is excluding the fringe time, so the fact that August is a heavy vacation month in Europe would not necessarily show up in the dropping utilization.

Just finally, on the litigation business side, is there any possibility of simultaneously billing clients at the same time as the law firms to help that process?

No. The way it generally works is law firms insist on our billing them first and they pass the bill onto the client.

Sure. They always want to sign off on the bill first.

That's for two reasons. One is discovery protection. If we were billing the client directly, there would be a higher chance that our work would be discovered in the proceeding, and secondly, the lawyers we're working with want a chance to review the bill before it's sent on to the clients. There's not a lot of scope for speeding that process up.

Okay. Understood. Okay. Great, thank you!

[OPERATOR INSTRUCTIONS]. At this time there appears to be no further questions. I would like to turn the call over to Mr. Jim Burrows for any closing remarks.

Thank you, everyone. We look forward to speaking with you on our third quarter conference call in September. This concludes today's call.

Thank you.