CRA International Inc (CRAI) 2006 Q2 法說會逐字稿

Good day and welcome to CRA International second-quarter 2006 conference call. Today's call is being recorded and webcast. 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. With us today are CRA's President and Chief Executive Officer, Mr. James Burrows and Senior Vice President and Chief Financial Officer, Mr. Wayne Mackie. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Mackie. Please go ahead, sir.

Thank you, Steve. These statements are based upon management's current expectations and are subject to a number of factors and uncertainties. The 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 results to differ materially from any forward-looking statements made by the Company include, among others, changes in the Company's effective tax rate, share dilution from the Company's convertible debt offering, the impact of the adoption of Financial Accounting Standards Board Statement No. 123R and total stock-based compensation, dependence on key personnel, attracting and retaining qualified consultants, dependence on outside experts, utilization rates, factors related to the Company's recent acquisitions, including integration of first personnel, clients, offices and unanticipated expenses and liabilities, risks associated with acquisitions it may make, risks inherent in international operations, the performance of NeuCo, changes in accounting standards rules and regulations, management of new offices, the potential loss of clients, dependence on growth of the Company's business consulting practice, the ability of the Company to integrate successfully new consultants into its practice, intense competition, risks inherent in litigation and professional liability. Further information on these and other potential factors could affect the Company's financial results is included in the Company's filings with the Securities and Exchange Commission. Jim?

Thanks, Wayne, and thanks to everyone for joining us today. After getting off to a positive start in 2006, our momentum extended into Q2 as we achieved significant top and bottom line growth. For the second quarter, revenue increased 25% to $84 million from $67.4 million in Q2 '05. The net income increased to $6.7 million, up nearly 23% from $5.5 million a year ago. EPS grew 12% to $0.55 per share compared with $0.49 per share for the comparable period last year. Included in the net income and diluted EPS amounts this quarter are approximately $900,000 and $0.07, respectively, as stock-based compensation expense. Weighted average diluted shares outstanding used to calculate EPS in the second quarter of fiscal 2006 was 12.2 million versus 11.2 million in the second quarter of fiscal 2005.

For the quarter, we increased our utilization to 80% compared with utilization of 78% in Q1 '06 and 81% in the second quarter of '05, on track with our guidance of 78 to 80% for full year 2006.

In late May, CRA announced the completion of the acquisition of the Ballentine Barbera Group or BBG. BBG is a Washington D.C.-based consulting firm specializing in transfer pricing services. BBG's primary service areas include controversy documentation, [clienting] and valuation. The addition of BBG's 35 billable staff to our existing transfer pricing experts provides us with recognized industry-leading consultants and a firm foothold in a rapidly growing worldwide market.

The acquisition of BBG also reflects CRA's corporate strategy of adding businesses that complement our core capabilities while further expanding our geographic reach both in the United States and abroad. We believe that this transfer pricing represents a very large and growing market for economic consulting services. With BBG's staff now on our roster, CRA has significantly enhanced its attractiveness as an alternative to the big four consulting practices, who have historically accounted for a very high percentage of this business. The accounting firms are now on the defensive as a result of independence issues related to Sarbanes Oxley that have discouraged clients from using their audit (indiscernible) for consulting work. CRA is ideally suited to compete for the business that has been freed up as a result of these independence concerns. The core skill needed for transfer price work is quantitative microeconomics, which is one of CRA's core skills. Transfer price work also requires multiple locations, particularly international locations, and CRA is one of the very few economics-based consultancies that has significant international diversification. The combination also provides CRA with complementary resources and synergies in the areas of recruiting and staffing and similar analytical skill sets are used in our economic litigation practice and there will be significant marketing synergies as BBG works for the same types of law firms and corporations as does CRA.

Also in late May, CRA's NeuCo subsidiary announced that it had completed the acquisition of Pegasus Technologies, an Ohio-based majority-owned subsidiary of Rio Tinto Energy America Services Company. NeuCo acquired 100% of the shares of Pegasus Technologies while Pegasus equity holders received a 26.5% interest in the common stock and equivalents in NeuCo post transaction. As a result of the transaction CRA's ownership in NeuCo has decreased to approximately 36%, which will require CRA to deconsolidate NeuCo from CRA's financial statements going forward. The merger will considerably strengthen NeuCo's position as a supplier of optimization of products and services.

In the second quarter, five of CRA's six largest practices requires substantial growth. I will cover each briefly within the context of the greater litigation of business consulting segments. Our litigation revenues grew about 30% over Q2 of last year. This growth was a function of continued strength in our core business and increased command overseas as well as the impact of our FY 2005 acquisitions of Lee & Allen and the former Lexecon Ltd. Our competition practice grew about 20%.

The M&A component of the competition practice accounted for approximately 11% of the Company's total second-quarter revenue as compared to 12% of first-quarter revenue and 7% of Q2 '05 revenue. Some examples of our competition and M&A work in Q2 around the globe included -- in the United States, CRA helped Disney with its acquisition of Pixar Animation.

In Canada, CRA provided economic testimony on behalf of the Commission or Competition and a dispute before the Committee of Compensation Tribunal involving Agricore United that successfully concluded with our client winning the case and the other side having to pay our costs.

In Europe, CRA assisted in the clearance by the European Commission and the Australian Austrian telecom regulator of the acquisition of Tele.Ring, an Austrian mobile phone operator by T-Mobile. CRA provided economic advice to T-Mobile throughout the merger.

Also in Europe, CRA worked for Korsnäs in connection with the merger of Europe's second and third largest producers of liquid packaging board.

In Asia-Pacific, CRA assisted Telstra in its appeal to the Australian Competition Tribunal on issues related to access pricing and has been working with the Defense Material Organization on achieving efficiency and defense procurement.

Also in Asia-Pacific, CRA is providing high core testimony in an upcoming trial in respect of a merger in the bus transport industry.

The finance practice had an outstanding quarter, with net revenues increasing nearly 30% compared to Q2 of last year and greater than 30% compared to Q1 of this year.

With respect to finance cases, CRA had an extensive amount of work on several high-profile litigation matters that require significant client deliverables during this quarter. CRA has been providing these clients with a more integrated litigation service offering by combining skill sets across a broad range of industries.

We also are working on various criminal and forensic assignments and damage and class-action matters. CRA continues to benefit from an active pipeline of work related to certain states' investigations of business practices within the insurance industry and SEC scrutiny of trading in the mutual fund industry. More specifically, we are working on several mutual fund cases in the United States and Canada, analyzing damages due to market timing, late trading and broker execution of trades and developing distribution plans relating to the settlement of regulator actions.

Revenue in our intellectual property practice grew nearly 15% compared to Q2 of last year. Some examples of IT work in the quarter include testimony in the patent infringement case against Microsoft and Autodesk Inc., that resulted in a successful $133 million verdict for our client. The verdict is a second largest patent loss for Microsoft. The patents related to anti-piracy software that the jury agreed was used in Microsoft's Office and Windows XP and Autodesk AutoCAD.

Assistance to a Texas-based oil and gas distributor in a breach of contract case against Exxon-Mobile Oil Corporation that resulted in a successful $33.6 million jury verdict.

And finally, testimony on behalf of Exide Technologies, a global leader in the manufacture of lead acid back batteries and its bankruptcy petition to avoid certain trademark licenses with [Intersist], a competitor.

The successful outcome of the case allows Exide to reclaim the right to fully utilize its brand across all product lines worldwide following a two-year transition period.

Turning to business consulting, revenue increased approximately 17% in Q2, driven by our pharmaceutical and chemicals and petroleum practices, which more than offset a decline in our E&E practice. Among our smaller business consulting practices, our performance was mixed, which is typical. The most notable of the group was our aerospace and defense practice that more than doubled from Q2 '05. As an example of work in this expanding practice, CRA conducted a study of the likely economic impact of the new class of aircraft known as very light jets, VLJs, for Eclipse Aviation, which is likely to be the first to market in this segment with introduction of the Eclipse 500 this summer. The CRA study quantified the implications for output earnings and employment for the production and deployment of fleet of 5000 VLJs over the next ten years as predicted by the FAA.

CRA also estimated the value of the time savings that would be made possible by the very large-scale use of VLJs in per seat on demand air taxi services.

Our pharmaceuticals practice continued to experience healthy growth fueled by new projects related to the evolving world of specialty pharmaceuticals and biologics and ongoing litigation projects related to pharmaceutical pricing.

Turning to chemicals and petroleum, revenue grew over 20% over Q2 '05 as a result of substantial increased revenues from the Middle East and significant growth of our London-based practice. Increased revenue from the Middle East includes business strategy work in Saudi Arabia, Jordan and Kuwait. Our pipeline of work in the Middle East is active and we're pleased with the number of opportunities we're seeing in that region. With the respect of some notable CMP assignments in Q2, CRA was commissioned by ConocoPhillips Alaska to provide expert testimony on the potential impact on Alaska proposed increases in oil and gas taxes. And CRA is working for a Canadian heavy oil resource holder to help it identify the best refining partner to upgrade its production. We're now transitioning our role into supporting our client with negotiations with an agreed short list of preferred partners.

Although E&E revenues declined by over 10% in Q2 compared with last year, the practice is continuing to work in high-profile assignments and the pipeline of engagements is improving. For example, in Q2, CRA began work on large assignments for two major coal burning utilities to assess the potential impact of future climate regulations on the Company's financial performance. This work will continue throughout Q3.

We also anticipate ongoing work and additional assignments relating to the buying and selling of generating plants and the financial and economic evaluation of what type of new generating plants should be built and where and when these plants should be built.

Looking at our business from a geographical perspective, international revenue was approximately 22% of total revenue compared with 19% in Q1 and only 14% in Q2 of FY '05, as a result of both organic and acquisition growth. We continue to manage and identify key opportunities in Europe, including staff additions and new client assignments to enhance our presence in the European litigation of regulatory markets. As I mentioned previously, our London office performed particularly well as we benefited from a considerable amount of Middle East work. The pipeline of work in the Middle East continues to be promising.

As we announced in today's press release, we made the decision in Q2 to shut down our Mexico office. This office had been a very successful location for us for several years but over time it had become unprofitable as available work [wore out] the infrastructure we were maintaining. The elimination of that office resulted in approximately $600,000 in second-quarter closure and severance costs, which was largely offset by the tax benefit from the office closing that reduced our Q2 corporate tax from 42 to 39%.

Looking at our headcount on that basis, series headcount in Q2 was 661, down slightly from 667 in Q1 '06.

FTEs were 649 for Q2 as compared to 656 for Q1. While the level of turnover was higher at the junior level than we expected, we presently anticipate the buildup of CRA's headcount will be skewed towards the last two quarters of the year as staff come on board during the summer following graduation.

Turning to NeuCo's performance, revenues for that business continue to be volatile on a quarter-to-quarter basis. Q2 revenue was $1.5 million, down from $1.9 million in Q2 '05 and in line with Q1 2006. NeuCo has a strong backlog and expects revenues to increase in the second half of the year, similar to the experience in 2005. NeuCo's acquisition of Pegasus Technologies was completed in late May. A portion of the purchase price for this transaction was allocated for accounting purposes to the settlement of outstanding patent litigation between NeuCo and Pegasus. Primarily as a result of the litigation settlement, CRA anticipates that its minority interest in NeuCo will result in a reduction of approximately $500,000 in CRA's net income over the balance of fiscal 2006. Essentially there will be a $0.04 hit to our bottom line from NeuCo for the remainder of the year.

As a result of the transaction, CRA is no longer the majority owner of NeuCo and will not be consolidating NeuCo's full results on our financial statements going forward. Instead, the NeuCo contribution to our financials will appear as minority interest [defect] on our bottom line that reflects our approximately 36% stake in the Company. For the balance of fiscal 2006, we believe the loss of consolidated NeuCo revenue and the impact on consolidated net income will be approximately offset by our recently completed acquisition of BBG. As previously disclosed, BBG's trailing twelve-month revenue run rate ending April 2006 was approximately $12 million. However, recent revenue trends indicate significant growth potential going forward.

With that, I will turn the call over to Wayne for the financial review. Wayne.

Thanks, Jim. As always, let me remind you that CRA's fiscal year operates on 13 four-week cycles, producing unequal quarters. Q2, Q4 and Q1 typically are 12 weeks each while Q3 is a 16-week quarter.

Recently recapping our results, Q2 revenue, as Jim mentioned earlier, increased 24.6% to $84 million. Second-quarter gross margin was 36.5% compared with 40.5% in Q2 of fiscal 2005. Approximately one-third of the gross margin percentage decline between the quarters was the result of the effect of 123R and stock-based compensation. The remainder of the gross margin decline was due to higher direct compensation costs resulting from a higher portion of our revenues being sourced by internal staff rather than outside consultants, whose performance payments are classified under SG&A costs rather than costs of services and other direct compensation costs.

Total reimbursable expenses were 10.2 million as compared to 8 million in Q2 2005 and represented approximately 12.2% of revenue in Q2 2006 and 11.9% of revenue in Q2 2005.

Total consultant utilization in Q2 was 80% as compared to 81% for the comparable period a year ago and up from 78% reported in Q1 of 2006. As Jim mentioned earlier, utilization has trended upward over the past several quarters.

SG&A expenses for the second quarter were $20 million or 20.8% of total revenue compared to 15.9 million or 25.1% of revenue in the second quarter of 2005. Q2 SG&A expenses improved on a percentage basis principally as a result of lower performance payments to outside consultants, which were partially offset by severance and other wind-up costs of the Mexico office.

The second-quarter operating income was $10.6 million versus $10.4 million in Q2 of fiscal 2005. Operating margin was 12.6% compared to 15.4% in the second quarter 2005. Excluding approximately 1.1 million of the pre-tax effect of 123R and stock-based compensation and approximately 600,000 impact from the Mexico office shutdown, operating margins in the quarter would have been approximately 12.4 million or 14.7%.

Interest income was $1.1 million for Q2 2006 compared with $334,000 in Q2 of 2005 and consistent with Q1 of fiscal 2006. The rise in interest income year over year is a direct result of higher interest rates combined with higher cash balances from our mid 2005 stock offering and cash generated from operations. The higher interest income contributed approximately $0.04 incrementally per share in Q2 versus the year-ago period.

Our effective tax rate in the second quarter was 39% compared to 42% in Q1 of 2006. The reduction in our corporate tax rate for Q2 2006 was due to an approximate 600,000 tax benefit of the closing of our Mexico office. For the remainder of fiscal 2006, we expect our tax rate to return to the 42 to 43% range.

Second quarter fiscal 2006 net income was 6.7 million or $0.55 per diluted share compared to 5.5 million or $0.49 per diluted share in Q2 of 2005. Net income and EPS includes the effect of 123R in stock-based compensation, which was approximately 900,000 or $0.07 per share in the quarter. In terms of share count, we calculated Q2 earnings per share using 12.2 million weighted average diluted shares outstanding, utilizing an average share price for the quarter of $48.27 compared to 11.2 million shares outstanding in Q2 of fiscal 2005.

As Jim highlighted, professional headcount stood at 661 at the end of Q2 compared to 667 consultants at the end of Q1. Our current staff breakdown is 206 junior consultants and 455 senior consultants.

Looking at the balance sheet, cash and equivalents stood at $112.9 million at the end of Q2 compared to $124.8 million at the end of Q1. Net cash used in operations in Q2 was $12.7 million compared to a use of cash of 8.3 million for Q2 a year ago. The reduction in cash balances reflects the pay-out of fiscal 2005 bonuses.

Billed and unbilled receivables in Q2 increased to $104.1 million compared to $96.4 million at the end of Q1 of '06.

Total DSO, days sales outstanding, were 102 days versus 109 days for Q1 of fiscal 2006. This consists of 35 days of unbilled and 67 days of billed for Q2 versus 38 days of unbilled and 71 days of billed for the first quarter of 2006. We continue to target DSO below 100 days.

Current liabilities were $67.5 million at the end of Q2 compared to $84.6 million at the end of Q1, due primarily to the pay-out of fiscal 2005 bonuses. Our capital expenditures totaled approximately $1.3 million for the quarter compared to $4.4 million in Q2 a year ago. Depreciation and amortization expense was approximately $2.2 million for Q2, consistent with the sequential first quarter.

During the second quarter, our closing stock price did not exceed $50 for at least 20 of the last 30 consecutive trading days. Pursuant to the terms of the indenture governing our convertible debentures, the [Coco] trigger was not satisfied and these debentures cannot be converted during our third quarter of fiscal 2006. The tests will be repeated each quarter. To-date, no bonds have been converted.

Lastly, at our annual meeting of stockholders held on April 21, 2006, our stockholders approved our 2006 equity incentive plan. The plan authorizes the grants of a variety of incentive and performance awards to our directors, employees and independent contractors, including incentive stock options, nonqualified stock options, restricted stock awards, restricted stock units, performance awards and other stock-based awards. The maximum number of shares through common stock issuable under the plan is equal to approximately 1,158,000 shares, which include approximately 658,000 shares that remained available for future awards under our 1998 incentive and nonqualified stock option plan as of April 21, 2006. On April 21, 2006, following the approval of the 2006 equity incentive plan and in accordance with the plan, approximately 100,000 shares of restricted stock were granted to certain employees and directors. In general, the restricted stock awards vest in four equal annual installments of 25% per year, beginning on the first anniversary of the date of grant and are subject to execution of a restricted stock agreement. For Q2 2006, CRA expensed approximately $97,000 of stock-based compensation associated with the amortization of the 100,000 shares of restricted stock, representing the period from April 21, grant date, to the May 12 quarter end.

In addition, we have adopted a policy with respect to the maximum number of stock options and restricted stock awards that we will grant under the 2006 plan during fiscal 2006 through fiscal 2008, which will not exceed a three-year average of 4.33% based on the total number of shares of our common stock outstanding at the end of each of those three fiscal years. For purposes of this calculation, grants made in connection with acquisitions will be excluded.

Now back to Jim.

Thanks, Wayne. In the first half of 2006, we have been successful in executing our growth strategy and we have generated impressive results. We believe the fundamental business trends in the markets where we serve will continue to provide sustainable demand for our consulting services across the majority of our practice areas for the remainder of fiscal 2006.

In addition, we believe the addition of BBG should approximately offset the impact of the loss of consolidated NeuCo revenue and bottom-line impact within our financial statements. As a result of these factors and our current pipeline of business, we are reaffirming our previously provided fiscal 2006 outlook and financial guidance. We anticipate revenue growth for the full year 2006 to be in the range of 18 to 20%. We continue to anticipate we can achieve full year utilization of 78 to 80%.

CRA anticipates net income for fiscal 2006 of 26.5 to $27.5 million or $2.18 to $2.27 per diluted share, which includes a $0.29 to $0.30 per share impact from stock-based compensation. Our 2006 EPS guidance is based on approximately 12.2 million average diluted shares and assumes a stock price of $44.81 for the remainder of the year, which is the average closing price of the last 10 trading days. Deviations from this stock price will cause our earnings per share to vary based on share dilution from our stock options and convertible bonds. These estimates are based on an effective tax rate for the remainder of the year of approximately 42 to 43%.

With that, I will ask the operator to open the call for questions. Operator?

(Operator Instructions). Matt Litfin, William Blair.

Hi, good morning, and congratulations on the quarter.

Thanks, Matt.

Did you give out the cash flow from operations and capital expenditures in the quarter?

I'm sorry, Matt, I didn't hear the first part of it.

Could we get cash flow from operations and capital expenditures in the quarter?

I thought I gave the capital expenditures number but let me dig it out of the script.

Actually it's the cash from ops that I'm most interested in. While you're looking for that, I will throw out a couple more. Was the DSO reduction year-over-year a direct result of any new efforts on your part and if so what were those?

Matt, I must be having a little bit of trouble hearing. I didn't hear the last part of your question.

Okay, I wondered if the DSO reduction was the result of any efforts on the Company's part and if so, if you could describe what those efforts are?

Well, yes, absolutely. As I think I mentioned last quarter, we were unsatisfied with the 109 days, which is where we were with DSO at that time. We are working on this and frankly we think we have some distance to go and some additional improvements we can make and we're working on that. So I don't by any stretch of the imagination stand here and suggest that we should declare a victory, having moved from 109 down to 102, but it clearly is in the right direction and we are going to continue to work at that.

In terms of Q2 and the cash flow from operations, it was -- we used 12.7 million of cash from operations and I believe the principal factor there was a payment of the bonuses that we did during the quarter. And the capital expenditures for the quarter were $1.3 million.

Okay, thanks. My last question is, given your large cash balance and your inability to pay down the convertible debt and given the low equity valuation right now, I wanted to test your appetite for implementing a share repurchase plan.

Hi, Matt. We have no plan to do that at the present. But this is a topic that is discussed at our Board on a regular basis.

Okay. Well, thank you.

Colin Gillis, Canaccord.

Can you talk a little bit about Fringe time in the May quarter, if you saw that ticking down from Q1. And also just talk to expectations for what we should be thinking about in terms of vacation and the August quarter, especially now that the international presence has expanded.

I don't have the fringe time in front of me but I know directionally it was down. We are looking for the data right now. And as you know, Q3 is a quarter in which we have a seasonal increase in fringe time is often quite significant. And as you know, our business is seasonal with Q2 and Q4 being relatively strong quarters and Q1 and Q3 being relatively weak because -- or at least softer than Q2 and Q4 because of the fringe time effect.

Fringe time in Q1 was a little bit less than 14% and in Q2 was a little bit over 9%.

The comparable quarter of the year ago, it was about 9% as well. So the year to year comparison is relatively (technical difficulty).

Okay. So in terms of -- I know utilization is obviously impacted by vacation time. I mean should we be thinking about a similar pattern in this August as we saw last year as opposed to prior years?

Yes, I think the patterns are fairly similar from year-to-year. And Q3 will always be a high fringe time quarter.

Great. Just regarding, on the gross margin line, do you have a current nonemployee expert count that you can share with us? And do they all have noncompete agreements?

Yes, for current nonemployee -- oh, I see, expert account? I'm not sure we have a current count. There is a number that we have disclosed in our 10-K.

Okay, I can pull that from the K. Will you be updating it in the Q?

I'm not sure if we update that particular statistic but I don't believe it's changed substantially since we issued the K a few months ago.

Okay, great. And then, Wayne, can you give us a sense as to what the cash flow from operations would look like ex bonus payments?

Bonus payments that were made in the I think April time frame were in the order of I think low 30s in the millions, like 32 million. So that's the principal difference.

Okay, great. Can you refresh us on the final partner lockup agreement and when that comes around, do you have the size of the shares that might be associated with that?

I believe the next date is April of '07 and I don't have an exact count on number of shares; it would be locked up but it would be on the order of a million shares.

Michael J. Fox, JPMorgan.

Good morning and congratulations on the quarter. I was just wondering if you could talk about the acquisition pipeline and given the strength in the business if it is getting harder to negotiate prices or there's still plenty of opportunities. And then also the hiring environment.

We have a number of potential acquisitions in the pipeline. There's nothing terribly advanced of any size. The hiring environment continues to be good; it is very active. We have lots of candidates that we're talking to on a fairly regular basis. And also, Q3 and Q4 are the quarters where we get the -- where the people at the entry-levels of both junior and senior come in. So we would anticipate significant staff additions from addition of analysts and senior associates in those quarters.

Brett Manderfeld, Piper Jaffray.

I wanted to kind of dig in a little bit on kind of the economic sensitivity in the business. I know you've diversified into several areas over the years, including intellectual property. But maybe you can -- could you comment on just how you view the economic sensitivity of the business now versus maybe a couple of years ago and what parts of the business overall or as a percentage of the business might be tied to activity. Obviously, M&A is one of the drivers of the business. Thanks.

We continue to believe that the vast majority of our business is not terribly related to the economic business cycle. As we have disclosed, we're running a little bit over 10% of our work coming from M&A work but obviously it has some connection to the cycle. Although it is not perfectly correlated with the business cycle. In addition, we now do M&A work around the globe so we're certainly diversified internationally in that area. For example, the European side of the business is very strong these days.

A lot of our growth has been in areas that are not particularly sensitive to this business cycle. I would say most of our litigation work is not sensitive to that. We are currently doing a lot of work that's related to the oil industry and to the Middle East and that is not particularly related to the business cycle; if anything, it might be contra-cyclical.

We do some work, obviously, for chemicals firms and other industries that might be impacted by the cycle. Our electric utility consulting practice, we don't believe is terribly business cycle related. So all in all, I think most of the revenues of the Company continue to come from sources that are not cyclical.

Okay, that's a good explanation. Thanks, Jim. I may have missed this, Wayne, but did you give out an organic growth rate overall for the Company?

We didn't. I believe last quarter, we said that we had stopped trying to report an organic versus acquisition rate of growth and that's where we are at now. We don't have a separate indicator on that.

Final question that, good to hear that the vast majority of the practices are growing very rapidly. But did you say one, Jim, that was not growing as fast as it had been in the past? One of the six?

Our electric utility consulting practice was down a bit during the quarter. We continue to think that the outlook is positive. Because there have simply been -- we do a lot of work in that area that is also M&A related and there's just been fewer of those types of deals recently.

Is that a -- if you look at the six major practices, is that the smallest of the six or one of the smallest?

No, the smallest of the six is pharmaceuticals, although it is growing rapidly and at some point they may become equal in size to the others. The electric utility practice is probably close to average the size, relatively the size.

Jim Janesky, Ryan Beck.

Good morning. On the topic of utilization, last year your utilization in the first half of the year was higher than this year and you averaged 78% for the whole year, which is the low end of your expectation for this year. So, do I assume then and what trends are going on that would indicate that utilization will not drop off in the second half of the year as much as it did last year? Does it have to do with just the amount of business in Europe or are you managing that better or how should we look at it?

We're a little bit more diversified than we were a year ago. I think the drop off last year was more than -- a little bit higher than has occurred in other years. So we still think that we're basically in the range that we'd projected.

Okay. And NeuCo, you did say that you had 8.4 million two years ago, in 2004 and 9 million in 2005. Do you think that you'll come in about that same range for the rest of -- for all of 2006, I should say.

Without considering the incremental revenues from Pegasus, NeuCo was projecting a slight uptick in revenue for the year for this year. So I would say that a reasonable estimate for NeuCo and without including Pegasus for the entire year would be a number in the same range as last year. The first half drop-off seems to be cyclical. We had a lot of contracts and we weren't able to get into the [point of fashion] style of software because the utilities typically wait for an outage. And typically outages aren't scheduled in time to get much done during Q2. I would say that the expectation for NeuCo before the merger was for a similar year as for last year and possibly for an uptick. The addition of Pegasus will add revenues. We don't have a firm estimate of that but it will be in the low millions of dollars. So obviously, the combined -- low million dollars on a full year basis.

Right, but you're not consolidating any more? I was just trying to figure the -- estimate the impact to your income statement.

We actually, in the script I believe referred to the balance of -- for fiscal '06, roughly $0.5 million impact from NeuCo. But again, we believe that is going to be substantially offset by the addition of BBG.

Right, (multiple speakers) that was --

(multiple speakers)

-- $0.5 million in net income, right, Wayne?

That's at the net income level, right.

The other thing point I think what's important to understand is that the revenues of NeuCo, the individual company, won't be part of our reporting on a going forward basis. There will be a small piece in for Q3 that is the portion to which the Pegasus transaction occurred. But it will not be in revenues on a go-forward basis. Simply the percentage ownership of their net bottom-line.

Okay, that's what I was trying to get at.

Wayne, if I could just add to that. I believe that much of the $500,000 is essentially a paper allocation. It's an assignment of some of the purchase cost of Pegasus to the patent dispute.

Exactly.

But we do not anticipate $500,000 of operating losses but a $500,000 impact to our earnings resulting from mostly from this paper allocation.

That's right. And just to be even a little clearer than that, the impact of NeuCo on a go forward basis, including this purchase price accounting issue that Jim just referred to, will not be in operating income. It will be in a one line item below our income after taxes number that when added to our income after taxes will get to the very bottom-line for net income CRA.

Right, okay. Is there anything in the BBG seasonality that makes the second half of the year more profitable and therefore more accretive than the first half of the year?

Jim, we don't have a real sense yet for the seasonality other than the fact that they're a services firm just like we are and they will have the same fringe time cycles as we do. But we have not had a chance to get totally familiar with any other seasonal effects.

Okay. Final question. Why the higher turnover, this cycle of junior people? What do you attribute that to?

We think that one of the factors is that a lot of business schools are now requiring or expecting two jobs before they admit somebody. So we are finding some people are leaving early partly because they want to get another job on their resume. And other than that, we're just not sure. There has actually been an increase over time in early departures that seems to be a trend. And obviously in future years, we will take that into account. What has happened is we had a number of people that departed in Q2 that we expected to leave in Q3 and the replacements are coming in Q3 but that affected our headcount, obviously.

So this is a business school trend, Jim? There's nothing internally to suggest that core turnover has gone up?

No, I would say the answer to that is no. And I think we have a very primordial crew. This is not an issue of morale effects or something like that. I think it is just the way the markets are operating right now.

Sandra Notardonato, Robert Baird.

I had a follow-up question to I think it was Michael's question on the hiring front. Can you talk a little bit about the wage inflation that you're seeing at the junior level this year versus last year. And how that is translating through the bill rate increases that you're planning on over the course of the next year or so?

I don't have the information specifically. I know that we raised our starting pay by a couple of thousand dollars roughly. This is within line of -- more or less roughly in line with our overall growth in rates of roughly 5% a year. And since the higher pay will take effect in the second half of this year when we set rates for next year, that will be reflected in the rates for next year.

So about 5%?

Well I am not certain of that number. I don't have it in front of me. It was roughly in that range.

Have you noticed an increase in the amount of money that more senior people are getting from the competition in terms of sign-on bonuses? And have you had to step up a little bit on that front as well?

I would say that the trend in compensation levels at senior levels has more or less been in line with historical trends. I would say there's anything dramatically different. Obviously, compensations are going up over time and our rates are going up to reflect that.

Okay. Was there any turnover at the senior level from the BBG group or acquisition, I should say?

I am not aware of any.

No, none at all that I am aware of.

And then the ratio of junior to seniors. How should we be looking at that longer term? I guess it's about 2 to 1 right now, a little bit over 2 to 1. Is the goal still to get it to about 4 to 1 or just an update on how you view that part of -- that piece of the puzzle.

We do have a goal to continue to increase the leverage and we think actually we will see an increase in leverage over the balance of the year as a result of the inflow of Canada's -- of the new employees coming in Q3 and Q4. I believe the junior and senior headcount that we released is -- the way it is defined, the ratio is actually around two seniors and one junior but that's because of where we draw the line. We tend to think -- we tend to look at leverage of consulting staff divided by officers and that has been running in the low three range and we certainly are targeting to getting that to the four to five range.

I'm sorry, I don't know the answer to this question; you may have talked about it in the past. Have you already made the offers for the candidates that you are expecting in Q3 and Q4 or is that a process you are going through right now?

We have a large number of candidates who have accepted offers that we know are arriving and are starting to arrive already in Q3, as well as early in Q4. In addition, we are now doing some additional recruiting at the entry levels so there will probably be some additional offers put out. At the more senior levels, that's a year-round activity and there's offers outstanding all the time.

By any chance would you happen to have the acceptance rates that you're getting for the recruiting at the entry levels or the more junior candidates?

I don't have that information. I'll actually obtain it and at the next appropriate time, we'll give that out. But I don't have it. We haven't been keeping that statistic.

(Operator Instructions). Colin Gillis, Canaccord.

Just some housekeeping items, what is the total number of officers now? And any update on consolidating London offices?

On the consolidation of London office, we're still very actively looking at that. That is a priority we have to get that done. So that will continue active.

In terms of the number of officers that we currently have, we're just looking at some information right now on that, Colin. I will dig it out for you and give it to you.

And just wrapping up on London. That's not going to result in any type of expense that's not already factored into the guidance?

You know, until we have the specific facility keyed up and locked in on, don't know what the accounting or the economics of that will be. So, just I don't know the answer to the question.

Fair enough, fair enough. In terms of litigation and consulting, we got the growth rates. Could you just break out exactly what percent of revenue each segment was?

Colin, say that one again?

Oh, just a breakdown of revenue between the litigation and the consulting pieces. You gave the growth rates but I didn't hear the percent of revenue.

I believe, Colin, that the data that we're tracking by practice is not the same breakdown as we use for identifying litigation versus business consulting because some of the practices do both litigation and business consulting. So we go through that calculation when we do the K but I don't think we have updated it recently.

Colin, to follow up on the number of officers at the end of Q2 was 164.

I believe he asked the number of offices.

Oh, offices.

It should be like 25 or so?

Yes, well, with Mexico, I think we could reduce the list by one at this point.

Are you able to break out revenue into those two buckets or is that not something that you can do at this time?

(multiple speakers) that's an analysis -- that requires a special analysis which we tend to do once a year. I don't think we have that data.

Wayne, how about bill rates for the quarter and also for the February quarter if you have that as well?

We increased bill rates by over 5% at the beginning of the fiscal year and the next bill rate increase will be at the end of this fiscal year.

Sure, I know you mentioned that. I was just wondering if there's an actual number you could assign to what bill rates were; we didn't get that on the February call.

We haven't calculated the one for this quarter, Colin, and I don't have here with me the Q2 one. I'm not sure if we have already disclosed that elsewhere.

Okay. Do you think we'll be able to get bill rates on the next call?

Yes, in fact, why don't we commit to giving you some information on that.

That would be great. And then just finally on the tax rate side, Wayne.

Yes.

Do you sort of feel that that -- is there any more forward (indiscernible) you're looking for into the out years -- is there anything that can be done to drive that rate down or do you think we are in a steady-state in the 42% range?

I think I have mentioned in some of the past calls our focus on planning and we mentioned the Mexico closure. One of our challenges in the past has been the losses in foreign jurisdictions, where we cannot tax benefit them, which has the effect of making our total effective rate appear much higher than is you, if you will, just the statutory rate. We're working on that one. Certainly closing Mexico, the side benefit is that losses tended to be pre and after-tax and that won't be a factor in the future.

But moreover, we're working on our whole transfer pricing structure between countries within the CRA consolidated network. And we are hopeful that that will yield some benefits. It is again too soon to declare victory or a likely victory on it but we are working on it very actively.

And if I were to think about a tax rate on the 123R, the option expense, would that 22% number that we talked about last quarter still be applicable?

Roughly, that's right. As I think I have explained, it's a quirky calculation because of the mix of nonqualified options versus incentive options and the accounting rules do not allow you to benefit the ISOs in calculating your effective tax rate. So that's why we end up with a rate quite different than the overall effective rate on the stock compensation piece.

Just circling back on the nonemployee exits. I mean, the shift of work or the shift of expense up into the gross margin line, that's not tied to departure of any non-employee experts, is it?

No, it's been pretty much the 90/10 split, roughly 90% of stock compensations and cost of sales and 10 in SG&A and that has been by and large where it has been.

Just to answer the question on the senior consultants, no, there have not been any departures of any note.

Okay, excellent. That's what I was just going to -- thank you very much. Congratulations on a great quarter.

Brad [Saffelow], River Edge Capital.

Good morning. Thanks for taking my question. I just wanted to ask generally about the options expense issue that seems to be plaguing most sectors of the market here, whether or not you have seen any engagements on the post dating of options grants and whether or not you view that as an opportunity for the company over the next probably what will be a couple of years of litigation activity and investigation activity.

To my knowledge, we haven't been engaged in anything yet although I can't be sure of that. That is the kind of area though that would lead to work for us and we would usually get hired after litigation has been filed. So it wouldn't be surprising; not have been hired yet on anything.

Okay, so as we start to see any class-action suits, we should expect something along those lines; perhaps it would be (multiple speakers)

Yes, I would imagine so.

Having no further questions, I would like to turn the conference over to Mr. Burrows for any additional or closing comments.

Thanks, Steve, and thanks to everyone. We look forward to speaking with you on our third-quarter conference call. This concludes today's call.

This does conclude today's conference. Thank you for your participation. You may now disconnect.