CRA International Inc (CRAI) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to the CRA International second quarter 2007 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 received by email. With us today are CRA's President and Chief Executive Officer, Mr. Jim Burrows and Executive Vice President and Chief Financial Officer, Mr. Wayne Mackie. At this time for opening remarks and introductions I would like to turn the conference over to Mr. Mackie. Please go ahead, sir.

Thank you, Felicia. Statements made during this conference call concerning the future business, operating results and financial condition of the Company and statements using the terms anticipates, believes, expects, should, or similar expressions are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based upon management's current expectations 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 statement made by the Company include, among others, changes in the Company's effective tax rate, share dilution from the Company's convertible debt offering and stock options, the impact of the adoption of national accounting standards board statement number 123(R) and total stock-based compensation, dependence on key personnel, attracting and retaining qualified consultants, dependence on outside experts, utilization rates, factors related to its recent acquisitions including integration of personnel, clients, offices and unanticipated expenses and liabilities, risks associated with acquisitions it may make in the future, risk inherent international operations, performance of Newco, changes in accounting standards, rules and regulations, management of new offices, potential loss of clients, dependence on growth of the Company's business consulting practice, the unpredictable nature of litigation related projects, the ability of the Company to integrate successfully new consultants into its practice, intense competition, risks inherent litigation and professional liability. Further information on these and other potential factors that could affect the Company's financial results is included in the Company's filings with the Securities and Exchange Commission.

Thanks, Wayne, and thanks everyone for joining us today. We were disappointed with our performance in the second quarter; while our business consulting practices exhibited strong growth several litigation related practices generated lower than anticipated revenues. There were a number of reasons behind the litigation related shortfall. First, several large litigation projects which can often end abruptly were settled during the quarter. At the same time we experienced a slowdown in some other projects, and these two projects were compounded by some delays in the startup of some large new litigation cases during Q2.

As the result, overall revenue for the second quarter of 2007 grew approximately 5% to $88.3 million from $84 million in the second quarter of last year. Net income for the second quarter, second quarter as a fiscal 2007 and fiscal 2006 was $6.7 million and EPS decreased to $0.53 per share in Q2 2007 from $0.55 in the comparable period of fiscal 2006. Our second quarter fiscal 2007 EPS included a net reduction in the tax provision of approximately $1.4 million or $0.11 per share, related to the conclusion of an advanced pricing agreement the Company entered into with the IRS. This benefit was partially offset by the effect of trap losses in several non U.S. locations. The decline on the bottom line was primarily attributable to lower than expected revenues.

Some investments we made during the second quarter in facilities and staff also contributed to the earnings decline. For example, our expenses for recruiting fees were more than $1 million higher this quarter as compared to a year ago, representing investments in senior level staff and new practices. As we have mentioned on previous conference calls, we are in the process of consolidating our London-based practices from several small offices.

In addition, we also incurred legal fees associated with the administrative matter before the Federal Energy Regulatory Commission related to our participation in the Enron case. The Chief Administrative Law Judge recently concluded that there was absolutely no evidence that CRA or its employees engaged in any unethical improper professional conduct in connection with the matter and recommended that the [court] terminate any further proceedings.

For the second quarter our utilization rate was 75%. This compares with 80% in the second fiscal quarter of 2006, to 77% in the first quarter of 2007. We are working to improve our utilization in the second half of the year, and we are now targeting utilization of 76% to 78% for the full-year 2007. One of the steps we took in the second quarter to address utilization was to carefully manage the productivity around headcount which declined from 724 consultants at the end of Q1 to 718 consultants at the end of Q2, consisting of 226 junior consultants and 492 senior consultants. We are now targeting internally generated employee consultant headcount growth by the end of the year of 6% to 10%.

The recruiting focus for the balance of the year will be on senior individuals who can help build business. New recruits who were hired early in the year will be joining the Company in the summer and fall but additional entry-level recruiting will be limited until we achieve planned utilization levels.

Before I discuss the performance of our specific business areas during the quarter I would like to remind everyone of the change we made in our practice structure. The fact that at the beginning of the year we realigned our businesses from practices to platforms; historically we have offered services in two broad areas, legal regulatory and financial consulting and business consulting. With the realignment we now operate under three platforms; litigation and applied economics, finance and strategy and business consulting. With the primary difference being the deconsolidation of our finance practice which has been separated into its own platform. The finance platform includes forensic accounting, forensic computing and investigative services.

The litigation and applied economics platform includes the competition trade, transfer pricing, intellectual property and legal and employment practices. The strategy and business consulting platform includes the chemicals and petroleum and materials and metals, energy and environment, pharmaceuticals, aerospace and defense, transportation and capital projects practices. Revenues of the business consulting platform grew nearly 25% from the second quarter of fiscal 2006. This growth was primarily attributable to solid results in chemicals and petroleum, transportation and capital projects. Energy and environment also posted modest growth in the second quarter of last year. Strength in these practices offset a considerable year-over-year decline in pharmaceuticals that resulted from the completion of the GlaxoSmithKline transfer pricing litigation and a temporary slowdown in our work on the average wholesale pricing litigation, both of which generated significant billings in FY '06 and Q1 of FY '07.

The pharma practice continues to be engaged in a number of matters for the industry in both the U.S. and Europe, and we expect growth in the practice to rebound although more likely in Q4 '07 as some new consultant hires begin to experience greater success with their business development activities. The chemicals and petroleum practice had an extremely successful performance in Q2 with revenues growing more than 90% from the same period of fiscal '06 and more than 40% from the first quarter of fiscal '07.

Large engagements from the Middle East continue to be a significant contributor to growth in this area. Some notable assignments in the practice during the quarter included helping a major international oil company to reduce its cost of procured services. Two CRA teams have worked with these businesses in 11 locations around the world analyzing opportunities and reducing costs. Preliminary results indicate potential for nearly $1 billion in cost savings.

Assisting a leading private equity group in evaluating the financial and strategic value of a large acquisition opportunity in the polymers area. Providing a strategy assessment for Newpark, which provides products and services to oil and gas exploration and production industry. Based on this work Newpark has begun a corporate transformation with specific growth targets by business and is pursuing the divestiture of its environmental business. CRA continues to support Newpark with its information programs including productivity enhancement acquisition and divestiture of support.

Continuing to provide strategic support to Solutia, which manufactures and markets chemical-based materials used in consumer and industrial applications. Following over two years of support we have recently supported Solutia's recent buyout of its JV partner, Akzo's holdings in the Flexsys rubber chemicals JV. Following the acquisition, we are actively working with the management team on developing a comprehensive strategy.

And finally, leading a group of technical financial human resource and legal consultants helping the Saudi Arabian Ministry of Water and Electricity establish two public private partnerships to operate the water distribution and wastewater treatment activities respectively in the city of Jeddah.

Elsewhere in business consulting our capital projects practice grew nearly 60% from Q2 of fiscal '06 and more than 50% compared with the sequential first quarter. Our capital's project practice provides a broad array of services focused on the effective execution and performance of large projects ranging from facilities to infrastructure. As I mentioned previously, energy and environment posted modest results in Q2 with revenues increasing by nearly 5% year-over-year. Our E&E practice continues to benefit from projects related to environmental and climate issues, very significant energy litigation cases and some activity in asset transactions in the electric utility industry.

More specifically during the quarter CRA was retained by a consortium of utilities and generators to assist in the design of California's capacity market with work projected to continue through FY 2008. CRA is also working with a large investment bank on the refinancing of a generation portfolio in the Northeast. E&E was separately retained by two defendants in a major litigation case to be heard before the Federal Energy Regulatory Commission. These assignments began at the end of Q2 and could continue until into FY 2008.

E&E's option group was hired at the end of Q2 to provide consulting services to a large wireless telecom operator. This assignment should continue into the first quarter of FY 2008. And finally in Q2, E&E continued to work on a number of projects for several companies related to the financial implications of climate change regulations on the company's generation business. This work is expected to continue for the balance of the year.

Turning to our litigation practices, overall revenue grew more than 5% from Q2 of '06, driven by an increase in transfer pricing which benefited from the May 2006 acquisition of the Ballentine Barbera Group. During the quarter we began several multinational transfer price projects for major clients that have involved the cooperative effort of personnel from transfer pricing offices in the U.S., London, Amsterdam and Melbourne offices. The projects involve both documentation and planning and the clients come from pharmaceuticals, investment banking and contact lens sectors.

The competition practice performance is up more than 15% compared to Q1 of 2007 but essentially flat for the quarter as compared to Q2 of last year. We are very active in recruiting new VP rainmakers and expanding our service offerings. CRA recently hired VP Marsha Courchane in order to expand its capabilities in the areas of providing expert testimony and analysis involving subprime and predatory lending, fair lending, housing economics and real estate finance.

We also added two new VP's in Australia to support a litigation and a product economics group in that region of the world. With respect to projects this quarter, CRA is providing the economic analysis associated with the ongoing federal review of several major mergers in the United States, as well as economic analysis in preparation of expert testimony on several ongoing litigation matters. In Canada CRA's involved in a similar merger matter before the Canadian Competition Tribunal working for [labob] Brewing Co. as it seeks to acquire an Ontario brewer.

With respect to our European competition practice CRA advised two of the UK's largest tour operators on their merger which was cleared by the European Commission without an in-depth investigation. Lastly, it was previously reported that a CRA Vice President, Evan Schouten, provided the pro bono economic rationale that contributed to the State of Connecticut awarding $5 million to a person who spent over 18 years in prison for a crime he did not commit. CRA recently expanded its waiver and employment practice with the addition of two new VP's, David Lamoreaux and Matt Thompson. David and Matt have extensive experience working with attorneys and human resource professionals on labor law issues in providing clients with estimates of economic losses, associated with employment discrimination, wrongful death and wage and hour matters.

Turning to our intellectual property practice, revenue was down more than 5% in Q2 compared with the same quarter of last year. On a sequential basis revenue decreased nearly 5%. Revenue was down partly due to the timing and transition of projects; the flow of new work is active and we are optimistic of our revenues for the balance of the year.

IT projects worked on in Q2 included assisting Canon Ink in connection with the West Texas jury trial brought by Texas-based Nano-Proprietary, Inc. Canon was able to convince the jury that no damages should be awarded to Nano-Proprietary despite a ruling that Canon had reached a license agreement relating to flat screen television technology. CRA also assisted Iconix Brand Group in obtaining a victory in the long-standing trademark infringement lawsuit against a number of defendants. The fashion brand owner was awarded $45 million in compensatory damages by a California jury in April based on testimony from a CRA expert.

Revenues in our finance platform declined more than 5% from Q2 of last year and increased slightly over Q1 '07. The practice was adversely impacted by a number of significant ongoing securities and bankruptcy cases that had laws related to case scheduling during Q2. Some of these cases are nearing completion and staff is being allocated to new assignments, while other cases will again increase activities as they progress toward report and/or testimony. As there is often an imperfect match in timing with the start-up of new cases, this transition has led to lower utilization todate in 2007. We anticipate new and ongoing projects to ramp up during Q3 and Q4 of '07.

The finance practice has expanded its service offerings in the areas of risk management, insurance and financial accounting evaluation. Over the last year the platform has strategically increased staffing with several new VP's and principles and marketing activity in these areas. New engagements have been initiated and staff is shifting from marketing towards active engagements. These areas represent an important growth opportunity for the platform.

The forensic accounting and forensic computing practice had a strong growth quarter reflecting a significant increase in new matters, several of which are large-scale international projects. We benefited particularly from synergies with other parts of CRA where a greater awareness of the capabilities has led to several valuable cross referrals into multidisciplinary, multijurisdictional teams, particularly in international trend arbitration work. Several matters that we are engaged in are using the services of two or more CRA offices and two or more CRA experts from different disciplines.

We've also assisted with the quantum computations in the ultimate settlement of one of the largest failed collateralized debt offerings ever seen in the international market. In addition we assisted with civil litigation surrounding the split capital debacle in the UK, again helping to secure a settlement. We continue to assist with a number of major international arbitrations being handled in several jurisdictions, both bilateral investment treaty matters and substantial cross-border corporate disputes.

Forensic computing has benefited from significant investment in sophisticated electronic disclosure hardware and software that is being used to great effect on disputes with enormous volumes of electronic disclosure. We are working with most of the major law firms in the UK in this area, as well as with government and law-enforcement agencies. Looking at our business from a geographic perspective revenues generated by CRA's non U.S. subsidiaries represented approximately 28% of total revenue in Q2, slightly ahead of 27% in the first quarter 2007, and up from 22% of total revenue in Q2 of '06. The growth outside the United States reflects the strength of the global economy and the continued flow of large engagements from the Middle East as well as the expansion of our London-based practice.

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

Thanks, Jim. As always, let me remind everyone that CRA's fiscal year operates on 13 four-week cycles, reducing unequal quarters in terms of length. Q1, Q2 and Q4 are typically 12 weeks in length, while Q3 is a 16-week quarter. Recapping our second quarter financial results as Jim mentioned revenue from Q2 increased 5.1% to $88.3 million compared to $84.0 million for the second quarter of fiscal 2006. Q2 2006 included revenue from Newco, which we deconsolidated in Q3 2006. Excluding Newco's revenue of approximately $1.5 million for Q2 2006, second quarter 2007 revenue increased approximately 7% compared to Q2 of 2006.

Prior to Q1 2007 we classified our internal information technology groups' labor costs as an element of cost of services. In recent years the IT group gradually became less involved in direct client projects and more focused on internal systems. Accordingly, similar to Q1 we recorded approximately $1 million in SG&A for Q2 2007 and reclassified $900,000 for Q2 2006 for comparability purposes. The effect of this reclassification was to increase the Q2 2007 and Q2 2006 gross margin percentage by approximately 1.2 and 1.1 percentage points, respectively and to increase the respective SG&A expenses as a percentage of revenue by the same amounts. This reclassification has no effect on operating income; all my comments that follow reflect this reclassification.

Second quarter gross margin is approximately 36.4% compared to 37.6% in the second quarter of 2006. The Q2 2006 gross margin would have been reduced by 0.4 percentage points if Newco had been deconsolidated for Q2 of 2006. The remaining lower gross margin percentage for Q2 of this year was primarily due to higher labor in fringe benefit costs as a percentage of revenue of 0.6 percentage points and higher reimbursable costs of 0.2 percentage points compared to Q2 of 2006.

Total reimbursable expenses in the second quarter of 2007 were $11.0 million or approximately 12.4% of net revenue compared to $10.2 million or approximately 12.2% of net revenue for Q2 of 2006. Total consultant utilization in Q2 was 75% compared with 80% recorded in Q2 of 2006 and 77% in Q1 of 2007. As Jim mentioned earlier, we are working towards improving our utilization the second half of the year by managing our hiring, particularly at the junior level. We are now targeting utilization rate of 76 to 78% in fiscal 2007.

SG&A expenses for the second quarter of 2007 were 26.3% of total revenue compared to 24.9% of total revenue in the second quarter of 2006. The Q2 2006 SG&A percentage would have been reduced by 0.9 percentage points if Newco had been deconsolidated for Q2 of 2006. The remaining second quarter SG&A expenses increased on a percentage basis principally as a result of an increase in recruiting fees of 1.2 percentage points, and an increase of 1.1 percentage points of rent due to an increase in a number of office locations including our new office in London and our expanded office in New York. Other increases in SG&A costs were attributable to legal fees associated with the FERC matter previously mentioned and high indirect travel offset by lower labor costs and outside consultant and audit fees.

Second quarter 2007 operating income was $8.9 million versus $10.6 million in Q2 of 2006. Operating margin for Q2 2007 was 10.1% compared to 12.6% for Q2 of last year, reflecting the lower than expected growth in revenue and an increase in cost items previously mentioned.

Interest income was $1.4 million for Q2 2007 compared to $1.1 million for Q2 a year ago. The growth in interest income was primarily due to higher interest rates. Our effective tax rate for the second quarter was 27.5% compared to 39.0% in Q2 of 2006 and 41.3% in Q1 2007. Our effective tax rate in Q2 of '07 included the net effect of two unplanned items totaling $1.4 million. One item for approximately $1.8 million related to the conclusion of an advanced pricing agreement the Company entered into with the IRS offset by a second item of approximately $400,000 related to the effect of trap losses in several non U.S. locations. Consistent with the guidance previously provided we expect our effective tax rate for the remainder of fiscal 2007 to be in the 42 to 43% range.

Second quarter fiscal '07 net income was $6.7 million or $0.53 per diluted share. This compares with net income of $6.7 million or $0.55 per diluted share in the second quarter of 2006. Net income for the second quarter of 2007 includes the tax benefit approximately $1.4 million or $0.11 per share previously mentioned. We calculated Q2 '07 earnings per share using 12.5 million weighted average diluted shares outstanding compared to 12.2 million shares outstanding in Q2 last year.

Looking at the balance sheet, billed and unbilled receivables in Q2 were $112.9 million compared with $111.5 million at the end of Q1. Current liabilities were $72.1 million at the end of Q2 compared with $71.7 million at the end of Q1. Today's total DSO, days sales outstanding were 106 days. This consists of 40 days of billed and 66 days of unbilled versus 111 days in Q1 which consisted of 40 days of unbilled and 71 days of billed. We continue to target total DSO below 100 days. As we mentioned last quarter, we have implemented a program that provides our consultants with specific DSO information relating to their client receivables and unbilled balances. This program will lead to a direct link of our consultants individual DSO with their compensation.

In July 2006 CRA announced a multiyear stock repurchase program of up to a total of 500,000 common shares. In the second quarter of fiscal 2007 CRA repurchased approximately 257,000 shares bringing the total purchases to 500,000 shares at an average price of $50.45 per share. Cash equivalents stood at $113.9 million at the end of Q2, down from $117.2 million at the end of Q1. The decline in cash reflects approximately $13.2 million for the stock buyback offset by approximately $8.3 million net cash from operations and $3.2 million for the exercise of stock option and several other miscellaneous items.

Our capital expenditures totaled approximately $2 million for the quarter compared to $1.3 million in Q2 of fiscal '06. Depreciation and amortization expense is approximately $2.3 million in Q2 compared to approximately $2.2 million for Q2 of last year. Our closing stock price exceeds $50 for the last 20 or at least 20 of the last 30 consecutive trading days during the second quarter of 2007. Pursuant to the terms of the indenture governing our convertible debenture the coco trigger was satisfied and these debentures can be converted during the third quarter fiscal 2007. The test will be repeated each quarter. Todate, as expected, no bonds have been converted.

Lastly, as previously reported on May 16, we extended the termination date of our $90 million loan agreement with Citizens Bank of Massachusetts from April 30, 2009 to April 30, 2010. Now back to Jim.

Thanks, Wayne. Overall we believe the fundamentals of the markets we serve remains strong, and the CRA International brand remains one of the most prominent, recognizable in our respective fields. We continue to win new engagements across all three of our platforms. Our entire executive team is refocused on recovering quickly from our disappointing Q2 performance. We are closely managing our headcount growth and examining our business plans in every practice. With that said we firmly believe that a broad range of industry trends continues to support the long-term growth of our business. We are also greatly encouraged by our positive performance in several of our practices, our expanded service offerings and our growth overseas.

Given the results we have reported year-to-date we now anticipate year-over-year revenue growth in the 10 to 12% range, annual net income growth in the mid to high teens percent range and EPS growth in the 12 to 18% range. As indicated in our news release this morning and consistent with past practice in order to estimate potential share dilution for our fiscal 2007 EPS guidance we based it on approximately 12.5 million average diluted shares for the year and a stock price of $49.97 which was the average closing price for the past 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.

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

Operator, before you do that let me correct one item that I mis-stated. This has to do with the DSO for Q2 which is 106 days. I think I stated backwards, it consists of 40 days of unbilled and 66 days of billed as opposed to the other way around.

(OPERATOR INSTRUCTIONS) Matt Litfin, William Blair & Co.

I think it was late last year you elevated three of your longtime rainmaker consultants to the EVP level to run the platforms. So my question is how related do you feel that the revenue shortfall in the second quarter is to some level of distraction of these three away from pure revenue generation and toward general managerial duties, if at all?

Matt, I don't think the effect will be significant, although there is undoubtedly some effect.

So I guess the next question would be how long do you expect that to persist and is that something that can be corrected?

Well, the three individuals in question are all active consultants, and they still have active consulting practices. Obviously some of their time will be diverted towards management, but as I said I don't think the overall effect is significant.

Another question is with your revised utilization range you've implied an uptick in the second half even though the third quarter is typically slower with summer vacations, etc. So what factors are giving you confidence -- for example had utilizations been higher in the past month than it was in the Q2, or what factors are giving you confidence there?

Well, we have some very fairly large new engagements that are coming in. I would caution, however, that the litigation part of our business, which is well over half of our business does not have contract backlog in the way a business consulting practice would. So we don't have contracts with this scope of work that we can predict off for months at a time. But we make our assessments based on the nature of the cases coming in and what we think their sizes are.

My final question is when is the next opportunity for the Board to consider further authorization for share repurchases and generally what is your appetite relative to the acquisition pipeline that you're seeing right now?

Well, there is a Board meeting next week, and we will be evaluating fairly carefully that kind of question.

And the acquisition?

On an ongoing basis.

And could you comment on the acquisition pipeline, Jim?

We have a number of potential acquisitions we are looking at; nothing that is imminent but some that are in reasonably advanced stages of discussion. But not at a stage where I can with any confidence say that they are going to happen.

Thank you.

Andrew Fones coming UBS.

There are some intellectual property legislation that is currently moving through the House and Senate and is scheduled -- could be passed into law towards the end of this year, I guess. Are you for or against the legislation?

I have to admit I am not aware of the specifics of it.

Okay. Just overall if you have any general sense on it, can you explain whether you think it could be positive or a negative for your business, between now and when the legislation perhaps is passed? And then once it is passed what the impact will be?

All I can say is I have had active discussions with many people in our IP practice in recent months, and no one has indicated any concern or one way or the other over this.

Okay; I guess I was just concerned that while there is an expected change coming through you may see kind of delays in lawsuits and things like that in the meantime. And then also I guess it seems as though the law, the legislation is designed to kind of remove nuisance type suits. So do you have any comments on those items?

Well, we probably wouldn't generally get involved in nuisance type lawsuits because we usually get hired when there is a large matter that someone actually expects to go to trial in a big way. We haven't seen any change in the flow of new opportunities.

Okay. In terms of turnover I guess now we've moved past bonuses and can you give me a sense of how that is trending and how that compares with recent periods? Just in a general sense.

The total turnover rate year-to-date is -- you're talking about turnover sales or turnover of staff?

Staff.

The total turnover rate year-to-date has been approximately 8%. Last year for the year it was 17.6%. I would add that a large percentage of our staff are relatively junior individuals that come here out of college and go on to graduate school, so there is approximately on the order of 30% to one-third of our total staff is on this type of three-year cycle. So there is a built-in termination percentage that could easily generate and 8 or 10% three-year turnover just based on that. So the turnover rates at the more senior levels have certainly been within a reasonably low range.

Okay. Thanks. Then perhaps just on a couple of your practices, you mentioned E&E. It sounds like there is a lot of new kind of contracts coming through there that could be kind of ramping up, either just started to ramp up recently or should be ramping up in Q3. Can you kind of give us a sense of what the impact of those could be? And then also you mentioned some investments you'd been making in the litigation area. Any sense there on when we could kind of see a ramp up in some of those investments?

On the E&E area the anticipation is that the new work will result in a modest growth of revenues. I can't quantify it any further than that. In terms of new investments we have -- we are starting to ramp up in the labor and employment area. We will see immediate revenues, but in terms of next 6 to 12 months it is low millions of dollars. Similarly, we have some new practice lines in the area of banking. Again, same kind of size range.

Okay, thanks.

Mike Fox, JPMorgan.

It sounds like there is a the hiring for the more senior level; can you talk about if it is becoming more expensive to bring people in with a lot of expertise? And then also on the lower level employees, can you talk about if you're seeing any type of increase in wage inflation?

At the senior levels there definitely is wage inflation. We do keep growing billing rates to offset that. From the point of view of bringing in a very senior person that has immediate prospects for business, that is obviously a situation where compensation demands are fairly high but that has always been the case. In terms of the more entry-level and intermediate level staff, we do continue to experience continued wage inflation, but we when we set rates we always set rates -- we always increase rates commensurate with that. So if something comes in a higher pay level, we make sure the rates cover it and then we examine that on an annual basis.

Okay, great. That being said, do you think pricing could increase more than originally expected for the balance of the year given that you are seeing the wage inflation that should impact your bill rates?

We make our general rate increases once a year, effective during the first quarter of the year. When we do that it is based on some projection of our costs. At that point we know pretty much what the cost of entry-level consultants will be because we are already putting out offers. So that is done on an annual cycle and that is the bulk of our rate increases. People that come in midyear that are not entry-level obviously we set a rate when they come in, that will be tied to the kind of compensation they are getting. So those are two different phenomenon. The second is an ongoing one.

With regard to the litigation settlements, did it take -- since they are such big cases -- did it take longer to put those people back to work? Did they have any inclination to take any time off before getting back to work and at this point, have they all been put back to work?

Certainly when there is a big case that either settles or just slows down which is a more likely occurrence, a big case might have 10 or 20 people working on it, and there is just frictional unemployment for a while. The most I've seen is resolving itself as new work comes in.

Okay, and did it take longer than expected to put those people back to work or was it just the fact that a number of cases settled during the quarter?

We did not anticipate as much of that as happened during Q2 in advance. So it was somewhat of a surprise to us at the time. It is just sort of the nature of the business.

And were the cases concentrated in any particular fields or any particular reasons why they settled that had any themes to it or was it just coincidental?

I think there is a pattern that occurred across four different practice areas; finance, competition, pharma and intellectual property.

Okay.

So there is no reason -- there is no correlation there.

And then just one final question. A lot of the M&A that -- not a lot, but a significant portion of the M&A right now is driven by private equity. Are you guys as involved in that type of work as you are in strict business combinations?

We actually do work for private equity firms and helping with some of these in doing due diligence. A transaction that involves simply taking a company private will not generally have the same antitrust implications, although there have been some cases there too that have led to competition concerns. So to the extent that companies have been taken private by private equity firms that probably does affect the overall amount of competition work and M&A although I would say that does continue to be a strong sector for us.

Okay, great. Thanks a lot.

Jim Janesky, Stifel Nicolaus.

A couple of questions. Stepping back for a second and looking at your internal process of consolidating your revenue outlook and communicating it to the Street, can you just talk a little bit how you go about that? Do you take litigation type of revenues, which you admit there is no contract backlog and haircut that, or how -- do you look at past cases and say well, this percentage generally settles within each given practice and at least take that into consideration, or how do you go about that?

It is done at the level of individual practices, and because you can't really project revenues in any particular case with any degree of certainty with a few exceptions; it is more based on what do we have in-house now that people are working on? What new work do we know is coming in and what the general pattern of the business is, it is basically a judgment call. In the areas of our business that operate with contracts it is really quite different. CMP, portions of E&E, aerospace and defense, transportation capital projects and a large element of the pharma practice have contracts, and they can make assessments based on contract backlog plus known opportunities. And generally projections three to six months ahead have some degree of -- you can make with some degree of confidence or at least more than in litigation area.

In the new large engagements that you talked about recently, are they in litigation, and what are the trends in the areas where you can have a higher degree of certainty?

Probably the largest project that has come in recently is in finance. It is actually not a litigation project. It is potentially, it may turn out to be one of the biggest projects in our history, but that project was one which we got retained on just last week. There is also a large new securities related matter that came in last week, and then there is -- we have had continuing engagements across all litigation practices on a fairly steady basis.

But this largest, this one in the finance practices is one that does have a higher degree of certainty -- just to be clear, I'm sorry.

It is a time materials project but it is budgeted at a very large-scale and it is budgeted to continue for a fairly long time.

Okay. When you look at the year-over-year growth rate even assuming on the revenue line item, even assuming or taking into account Newco, you essentially grew at the amount of your price increases. Yet you admitted on the call you've been hiring a lot of new rainmakers and even going back over the last 12 months, we've seen the significant amount of press releases with individuals that are coming in that I would consider are revenue generators. Is there something in terms of their productivity that has not allowed them to offset any of the issues that came up over the last couple of quarters?

Most of the new people have come in relatively recently and there is just a [ramp up] involved. So I don't think anything is out of line. It is just that it takes time to ramp up their practices. There has been a fairly significant amount of recruiting activity that has not probably affected revenue very much in the first two quarter of this year but we do look forward to start having a real impact going forward.

Okay, so with that in mind and taking a look at your new revenue outlook with already half or more than half of that coming in terms of a price increase, then organic growth of 5 to 6% does not seem like a stretch to me. Is that correct, or is there something I am missing?

No, it should be, we should be able to do better than that certainly over the medium to long term. But that is well below our planned growth.

Last question is, when you are looking out you folks give us an idea of an outlook for the year, and one of the risks of that is that we're going to have quarterly fluctuations on the upside or the downside. As we look into the next fiscal quarter other than larger and larger percentage of your revenues coming from the international segment, which we should take into account unless there is something I am missing with respect to international vacations, is there anything else that we need to be aware of as we move into the third fiscal quarter?

Obviously there is always the vacation schedule that's mostly in the month of August but as far as having an affect, other than that. So that is the seasonal pattern of our business that we take into account regardless of how busy we are.

Okay but beyond that you don't see any other significant patterns?

No.

And just as a follow-up, recruiting fees, do you include in that upfront bonuses, or do you just mainly actual fees associated with traveling and bringing people into your office or going to other places to recruit?

No, this is recruiting fees paid to search firms. It includes fees paid at all levels of staff, even junior staff if they come in from a search firm.

But not any type of upfront bonuses, right?

No, this does not include those types of costs.

All right. Thank you.

(OPERATOR INSTRUCTIONS) Randy Hugen, Piper Jaffray.

Can you give an approximation of the percentage of your revenues right now that are somehow derived from M&A?

We don't have an estimate of that. The reason is that when we try to do a project by project basis there are just a lot of ambiguities about is it really an M&A project or does it bleed into other things. But I could say qualitatively it continues to be a strong area of business for us. The staff that are primarily M&A related have been quite busy on a consistent basis, both here and abroad. But it is difficult for us to come up with a precise number that we can announce.

All right, and do you see any fundamental differences in the demand environment now compared to a year ago or even two years ago?

I think the demand environment continues to be obviously good. But I am not sure there's any fundamental difference.

All right, and then Wayne, if we look at SG&A on kind of I guess an absolute dollars per week basis, is that going to trend up for the rest of the year or is it going to come down?

On an absolute dollar basis it would be close to the same that it is running at, it might be up slightly.

All right. Thanks a lot.

(OPERATOR INSTRUCTIONS) At this time there are no further questions in the queue. I will turn the conference back to Mr. Burrows for closing remarks.

Thank you, everybody. And we will see you next time.

That concludes today's conference; we thank you for your participation.