CRA International Inc (CRAI) 2008 Q4 法說會逐字稿

Good day, and welcome, everyone, to CRA International's fourth quarter and year-end 2008 conference call. Today's call is being recorded. You may listen to the webcast on CRA's website located at www.CRAI.com. In addition, today's news release is posted on the site for those of you who did not receive it by e-mail. With us today are CRA's President and Chief Executive Officer, Mr. Jim Burrows, Chief Operating Officer, Mr. Paul Maleh, and Chief Financial Officer, Mr. Wayne Mackie. At this time for opening remarks and introductions I would like to turn the call to Mr. Mackie. Please go ahead, sir.

Thank you, Diego. Statements made during this conference call concerning the future business, operating results, estimated cost savings and financial condition of the Company and statements of the Company and statements using the terms anticipates, believes, expects, should or similar expressions are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements are based upon management's 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 statements made by the Company are included in the Company's filings with the Securities and Exchange Commission and in today's news release which is posted on the Company's website.

The Company cannot guarantee any future results, levels of activity, performance or achievement. The Company undertakes no obligation to update any of its forward-looking statements after the date of this call. Let me remind everyone that CRA's fiscal year typically operates on 13 four week cycles producing unequal quarters in terms of length. Q1, Q2 and Q4 are typically 12 weeks in length with Q3 being a 16 week quarter. However, the fourth quarter we just completed was a 13 week quarter and fiscal 2008 consists of 53 weeks. 53 week years happen about every six years. Jim?

Thank you, Wayne, and thank you, everyone, for joining us today. I also want to welcome Paul Maleh to our call today. As we announced in October, we promoted Paul to the position of Chief Operating Officer and tasked him with creating greater efficiency within our organization and delivering more invasion to our clients. Paul will be speaking to you about his priorities later in the call. First, as a result of the charges we took in the quarter, I encourage everyone to refer to today's news release for a full reconciliation of GAAP revenue net income and earnings per share to non-GAAP revenue net income and earnings per share. We have a number of factors that affected our results for the quarter, including various restructuring initiatives, the repurchase of convertible bonds and the consolidation of the results for our NeuCo subsidiary for CRA became the majority owner own in the quarter. As outlined in today's news release, total revenue for the fourth quarter of 2008, the 13 week period ended November 29, 2008 was $85.6 million, a decline of $13.1 million from the fourth quarter of 2007.

For a clear comparison of how we performed in Q4, there are four factors to take into consideration, first revenues dropped by approximately $5 million as a result of the divestments of lines of business and geographies. Second, the strengthening of the US dollar in Q4 lowered our foreign currency denominated revenue. Using last year's exchange rates, our foreign currency denominated revenue this quarter would have been approximately $3 million higher. Third, the year-over-year decline in client reimbursables which are essentially passed through expenses that carry little to no margins was approximately $2.7 million. Fourth results for the fourth quarter included an additional week of revenue compared to the same period of fiscal '07.

Our business in the fourth quarter was affected by the global economic slowdown as clients for some of our larger litigation case, requested us to slow down the pace of work and some of our business consulting clients delayed the contracting of new consulting projects. The silver lining is the vast majority of the litigation cases haven't been settled and most of the consulting projects are just being delayed. We anticipate there will be a catch up in the future in the revenue generation rate from these clients and projects.

Utilization in the quarter was 69%, down sequentially from Q3's rate of 71%. For the year utilization was 71% which remains below historical levels. In Q4 we determined our earlier cost cutting measures in Q2 were insufficient and we needed to take more aggressive action. In the face of a slowing economy we made a decision to sharpen our focus on our core businesses and shed additional underperforming practices. In Q4 we reduced our consulting head count by more than 80 heads, exited several smaller practices and closed select offices and reduce the size of some of the others. None of the actions we took in Q4 and earlier in the year affected our revenue generating capacity at our core practices. We estimate that these Q4 actions will lower our cost structure by approximately $11.5 million on an annual basis going forward. In combination with the savings from the divestitures and restructuring actions we took in the first and second quarters, we have now reduced our overall cost structure on an annualized basis going forward by a total of approximately $22.2 million.

Looking at our consultant head count, we ended the quarter with 610 consultants compared with 692 at the end of Q3 and 771 at the end of 2007. On a percentage basis we have reduced our consulting base by a total of 21% during fiscal '08. Our current break down is 192 junior employee consultants and 418 senior employee consultants. On average, net revenue realization rate per billed hour for fiscal 2008 increased 3% to $354 from $344 for fiscal 2007. This reflects the effect of our annual rate increase in Q1, offset by exchange rate effects and changes in the geographic mix of our work. Revenue for a consultant for fiscal 2008 was $534,000 compared to $545,000 for fiscal 2007 reflecting the 4%, a four point decrease in utilization, to 71%. We have implemented rate increases for 2009 that are expected to increase the average hourly revenue realization rate by over 5% for the year, although the effective increase in Q1 is likely to be somewhat less than 5%.

Turning to our performance in different areas of the business. On a GAAP basis, litigation to applied economic revenues declined a little more than 5% for quarter due in part to the divestiture of the underperforming competition practice in Australia in Q2 and the decline the dollar exchange rate of the British pound. For fiscal year 2008, revenue was essentially flat without adjustment for the divested businesses and exchange rate change and was up moderately on an apples to apple basis. Demand during the quarter continued to be strong for mergers and acquisition work and antitrust litigation. Examples of our competition work in the quarter included competition analysis and numerous mergers such as the Aon Benfield insurance brokerages, CC Information Services Mitchell International automobile software, Co-operative Group, Summerfield, UK grocery stores, Lloyd CSB, HBOS UK Banks and [Sappy Embriel] UK graph paper mergers. In addition, CRA supporting Intel in an antitrust action in Korea. CRA provided expert testimony before the Canadian Competition Tribunal in a private refusal of supply case on behalf of Westco. CRA provided key economic antitrust analysis and discovers $2.75 billion settlement agreement with Visa MasterCard. And CRA advised Olympic Airlines in regulatory approval for privatizing its business, and advised Del Monte in its case European commission related to information sharing practices with respect to the supply of bananas.

Of particular note CRA held the sixth annual conference on economic developments in European competition policy in Brussels on December 3rd. Nearly 400 participants attended this successful event. Revenues for intellectual property consulting and litigation were roughly equal to revenues in Q4 of last year. Our experts were involved in a number of patent infringement cases including testimony on behalf of a gear systems and a music ship patent suit against Sony Corp., testimony in the software copyright infringement trial brought by the MathWorks against COMSOL of Sweden and testimony and arbitration brought by Digene against Gen-Probe and Hoffman-La Roche the breech of a license for human papillomavirus, a precursor to ovarian cancer. After posting excellent growth in Q3, pricing revenues slowed during the fourth quarter as tax departments adjusted their focus from tax filing to year-end closing. However, we continue to be involved in longer term global restructuring and replanning products as well as supporting several active litigation and government negotiations such as advanced pricing agreements.

For the fourth consecutive quarter, revenues from our labor and employment litigation practice continued to grow rapidly. Revenues in this area more than doubled in the past 12 months. We have recently added several senior consultants to support continued growth in this area. Our finance revenues were down nearly 40% from Q4 of a year ago. For the year, revenues were down nearly 20%. We continue to be adversely affected on a year-over-year basis by the conclusion or reduction in scale of some major projects that is have not been replaced by projects of comparable scale. However we are still actively engaged on a number of securities litigation projects, assisting clients in damage assessments and state and merger evaluations and breech or contract analysis. For example during the quarter we worked on a project for valuing damages related to a project recall on a consumer product.

CRA is also actively involved with significant clients or potential clients that have issues related to the global economic and financial crisis, although most of these cases have not begun the ramp up. Our pipeline of cases in this area is very strong as we are involved with many of the big name cases that are expected to arise from this financial crisis. Work from a number of these cases is at a direct stage, we anticipate many to grow over time to a larger scale. Our insurance economics group continues to work in a variety of class actions related to annuity evaluation and sales practices, evaluation of insurance contracts, and the operation and financial risk faced by insurers and other financial institutions. Our forensic practice headquartered in London rebounded from a slow Q3 on a normalized basis and pick up a number of notable assignments as the fourth quarter progressed. We participated in a broad range of international arbitration work, projects relating to warranty claims and damage estimation. Our prospects in this area are promising. Our business consulting platform revenues declined by about 15% from the year earlier quarter, much of this is directly attributable to the effects of divestments and other foreign exchange effect I mentioned earlier. For the year revenues declined by about 5%.

Life sciences revenues grew more from 50% in Q4 of last year. We benefited from our involvement in four ongoing product launches, global interest and new pricing paradigms, and US-based work on the challenges posed by specialty pharmaceuticals. With respect to litigation assignments, the practice continues to be engaged on numerous national and global matters regarding pharmaceutical pricing, off label prescribing and generic entry. Our energy and environment practice declined by about 25% for the quarter and about 5% for the year. Revenues in this area were significantly affected by the postponement of revenues from major clients in the Middle East in 2009.

CRA continues to participant in a broad mix of engagements in the fourth quarter, including: completion of a report on the economic and financial impacts in Minnesota or regional cap of CO2 emission, completion of a report that details effective practices in the integration of renewable energy and the US transmission system, our excellent work on the acquisition of NRG energy, for the Texas Public Utility Commission, work on a cost benefit analysis of the implementation on a model for wholesale market for electricity, a consortium of electric utilities, completion of a study on the economic benefits of constructing 1,200 miles of a high voltage transmission line in Kansas for a mix of private equity firms in companies, assistance with the purchase and sale of generating plants and analysis of the financial implications of climate change policies and operations. For RWE and for New Zealand's Fonterra Co-operative Group Limited, the design and execution of successful auctions. Auctions for these companies are expected to continue through the end of FY '09. For the United Arab Emirates, work on the reorganization of the country's water and electricity sectors.

Global and consulting revenues in Q4 declined by about 20% from the year earlier period. North American revenues declined as a result of significant downturns and orders experienced by our clients. Our clients are starting to see a recovery in orders which should improve the prospects for selling consulting work to them. We have already seen a strengthening in our lead stream. Overseas, GIC work in Europe and the Middle East was somewhat soft for Q4, but picked up as the quarter progressed. We have a very strong pipeline of potential new business as we enter 2009 and we are encouraged about our long-term prospects in this region. In total CRA Q4 International's business represented 22% of total revenue. This compares to 26% in Q4 of 2007 and 21% for Q3 of this year.

International business represented 22% of the total revenue in fiscal '08 compared to 27% in fiscal '07. These declines were partly result of the divestitures we have made in Australia, New Zealand, as well as the exiting of some smaller practices overseas, and the strengthening of the dollar relative to the British pound and other foreign currencies. With that, I will now turn the call over to Wayne for his financial review. Wayne?

Thanks, Jim. Briefly recapping our Q4 results, GAAP revenue declined 13% to $85.6 million compared to $98.7 million for the fourth quarter of fiscal '07. As Jim mentioned, besides the difficult economic environments, there are a few factors that impacted our decrease in revenue as compared to the fourth quarter of last year, which included the practices we divested of which contributed approximately $5.0 million, foreign exchange effects of approximately $3 million, and a decrease in reimbursables of approximately $2.7 million. However, revenue was benefited by the fact that the quarter was 13 weeks versus 12 weeks for the prior year. The reconsolidation of NeuCo added about $800,000 to our Q4 GAAP revenue. One note on reimbursables dropped to 12.2% of revenue compared to 13.4% of revenue in Q4 of '07.

As described in our press release, our GAAP results for the fourth quarter of fiscal 2008 reflect $4.9 million related to restructuring costs that included employee separation costs attributed to a reduction in consulting staff, office closure costs in Austin, Dallas and Melbourne, reducing space in Houston and exiting from our capital projects and legal business consulting practices. Annual cost savings from those restructuring actions are expected to be approximately $11.5 million. Utilization in Q4 of this year was 69% compared to 74% for Q4 of 2007. Our GAAP results also included the impact of consolidating NeuCo, as a majority owned subsidiary starting again during Q4. During the fourth quarter, a NeuCo shareholder who is unrelated to CRA sold its shares back to NeuCo. This transaction resulted in CRA's ownership percentage increasing to approximately 50% and requiring us to once again consolidate NeuCo into our financial results beginning in the fourth quarter.

NeuCo is not a strategic investment for CRA. Its operations have been and are expected to remain immaterial to CRA's financial position and results of operation. Accordingly NeuCo has been excluded from our non-GAAP results for all periods presented. Fourth quarter gross margin on a GAAP basis was 34.6%. Q4 gross margin on a non-GAAP basis was 36.9%. This compares with gross margin of 38.3% in the fourth quarter of 2007. The reduction in gross margin percentage is due largely to lower revenues combined with lower utilization in 2008. Fourth quarter GAAP SG&A expenses were $25.4 million or 29.6% of GAAP revenue. On a non-GAAP basis, excluding the restructuring items mentioned above in the effects of NeuCo, SG&A expenses were $21.5 million or 25.3% of revenue in Q4, compared to $24.5 million or 24.8% of revenue in the fourth quarter of 2007. While the percentage increased over 2007, the $3 million non-GAAP reduction aggregate SG&A costs reflects the effects of significant cost reduction steps we took during the year. We have achieved reductions across the board in areas such as travel, depreciation, outside consultants, commissions to nonemployee experts and recruiting. We will maintain our strict cost control approach and are continuing to review SG&A costs for additional savings.

On a GAAP basis operating income was $4.2 million for the fourth quarter or 5% of revenue. Non-GAAP operating income in Q4 was $9.8 million or 11.6% of revenue. This compares with $13.3 million or 13.4% of revenue in Q4 of '07. Although we were unable to reduce our costs enough to maintain our non-GAAP operating margin percentage, the Q4 revenue reduction of $13.9 million was offset by cost reductions of $10.4 million in cost of services SG&A areas. The cost savings overall reflect staff reduce, operating efficiencies from the restructuring efforts and other control initiatives. Total interest and other income was $1 million for the fourth quarter 2008 as compared to $225,000 in the fourth quarter of 2007. The primary reason for the increase was that we benefited from repurchasing $10.2 million of our convertible bonds at a discount, resulting in a $1 million gain on a pretax basis. This gain was offset by a decrease in interest income. Interest income in Q4 of 2008 was approximately $500,000 compared to more than $1 million in the year ago period, reflecting the significantly lower interest rate environment as well as buy back of $11.8 million of common stock earlier in the year in addition to the repurchase of converter bonds in the fourth quarter.

Our GAAP tax provision for the quarter was $3.1 million or 59.1%. Our non-GAAP provision for the quarter was $4.3 million on a pretax income of $10.2 million, resulting in an effective tax rate of 41.5%. This compares with a tax provision in Q4 of 2007 of $5.5 million on pretax income of $13.5 million that resulted in an effective tax rate of 40.9% in Q4 of 2007. On a full year basis, our 2008 tax rate on a GAAP basis was 61.2% and 49.9% on a non-GAAP basis, as compared to a 2007 GAAP tax rate of 39% and a non-GAAP rate of 42.6%. The higher full-year 2008 tax rate was due to continued trap losses overseas that were either benefited at a tax rate lower than the statutory US rate or provided no tax benefit at all and a reduced level of taxable income in North America. The lower 2007 tax rate reflected a benefit in the tax provision related to the conclusion of an advanced pricing agreement the Company entered into with the IRS. Our Q4 2008 GAAP net income was $1.9 million or $0.18 per diluted share. This compares with GAAP net income of $10.3 million or $0.89 per diluted share for same period of 2007.

GAAP net income in the fourth quarter of fiscal 2008 included the previously mentioned pretax restructuring expenses of $4.9 million associated with the series of initiatives designed to reduce the Company's operating costs and improve utilization, a $207,000 foreign currency loss related to liquidation of our New Zealand based operations, and a pretax gain of $1 million and a related tax effect of $400,000 related to the Company's repurchase of $10.2 million of its convertible bonds at a discounted and a loss of $310,000 related to NeuCo. GAAP net income for 2007 included a benefit of $2.3 million related to the Company's equity in NeuCo, which included a $2.1 million benefit from the licensing of intellectual property rights by NeuCo. Excluding these items, non-GAAP net income for Q4 of 2008 was $6 million or $0.56 per diluted share, compared to Q4 2007 non-GAAP net income of $8 million or $0.69 per diluted share. We calculated Q4 '08 GAAP and non-GAAP EPS using 10.7 million and 11.6 million shares in Q4 '07. The reduction in diluted shares outstanding is the direct result of our share repurchase plan as well as a reduction in reduced share price which decreased the number of common stock equivalents.

Turning to the balance sheet, billed and unbilled receivables in Q4 were $101.2 million compared to $101.5 million at the end of Q3. Current liabilities at year end were $109.4 million compared to $91.7 million at the end of Q3. Total DSOs, days sales outstanding, was at 98 days. This consisted of 36 days of unbilled and 62 days of billed, an improvement over the 100 days reported in Q3, which consisted of 36 days of unbilled and 64 days of billed. Our goal is to keep our DSO below 100 days. Cash and equivalents stood at $119.3 million at year end up from $113.5 million at the end of Q3 and $100.5 million at the end of fiscal 2007. As a reminder, we purchased $10.2 million of convertible debt during Q4 and $11.8 million of common stock earlier in the year. Net cash provided by operating activities contributed $12.2 million in Q4, compared to $18.7 million for Q4 of 2007.

With ongoing financial market turmoil, CRA has elected to keep its cash and equivalents in the safest form of investments such as treasury bills. While our overall yield on cash investments is suffering in the short term, we believe this remains the prudent cost of action until the markets settle down. We continue to anticipate positive cash flow from operations. Our capital expenditures totaled $1.3 million for the fourth quarter, and $9.2 million for fiscal 2008 compared to $2.4 million for Q4 of '07 and $11.1 million for fiscal 2007. Depreciation and amortization expense was approximately $2.2 million for Q4 compared with $2.4 million for Q4 of last year. To give investors a better sense of the scale of our business on a go-forward basis, the practices we eliminated and divested this year contributed $15 million of revenue in fiscal 2008 and accounted for approximately $30 million in revenue in fiscal 2007. That concludes the financial review. Jim?

Thanks, Wayne. Turning to our outlook, I would like to echo the comments made in our press release today. We have taken aggressive steps to position CRA to ride out the current recession and emerge as a strong competitor. Clearly this was a very challenging year for us, but shedding our underperforming assets and substantially lowering our cost structure during fiscal 2008 will enable us to operate more efficiently and help us to more rapidly return to profitable growth as our markets improve. We remain one of the most recognized brands within our fields of expertise. Our pipeline of activity particularly within our litigation practices was healthy in the fourth quarter and we continue to expect further rebound in our Middle East revenues. We believe the global economic slowdown and global financial crisis will ultimately lead to substantial litigation assignments for CRA.

As I mentioned we are already retained on many of what we expect to be the largest cases. With this second wave of restructuring now completed, our focus going forward will be on improving utilization, improving margins, controlling head count and overhead costs, and continuing to generate business within our core segments. We plan to be very conservative in recruiting with the aim of hiring only for need to increase revenue generating ability. With normal turnover and delayed impacts of the actions we took in Q4, Q1 head count is likely to decline by 1% to 3%. We are continuing to recruit with the expectation that head count will start to trend up as the year progresses and that it will end the year above the current level. We will make decisions on head count growth later in the year based on our utilization trends and revenue opportunities. We continue to target an improvement of our time and utilization to our long term target in the high 70s, but significant strides will be difficult in the short run because of the mixed economic climate.

Operationally we have a number of initiatives underway that control expenses and maximize efficiencies. Before we open the call up for questions, I want to turn the call over to Paul Maleh on these topics. Just over two months ago the Company took a significant step by creating a new position at CRA, Chief Operating Officer. The position has been structured to focus on three critical areas: revenue growth, enhancing our relationships with clients and managing our internal operations. Paul Maleh, the Executive Vice President of CRA and the leader of the finance platform was selected to fill this important role. I would like to formally introduce him to you and to provide him the opportunity to say a few words. Paul?

Thank you, Jim. Thank you for the opportunity to speak at today's call. I'm excited about my new role and look forward to helping the Company in these critical areas. These are challenging times. The economic downturn is changing the way many will conduct business. It is therefore essential we stay close to our clients, that we listen to them and that we understand the pressures they're facing. We must then take this information and develop value-added service offerings that will meet our clients evolving needs.

Enhancing client relationship will be a priority for me. I intend to launch a formal client satisfaction and client relations review initiative at CRA. This will insure that we are actively soliciting input from our clients and responding to their needs. In the area of business development and marketing we will be enhancing our corporate brand this year with the new marketing campaign, which will differentiate us and provide a broader view of the firm's capability. We will also reintroduce the Charles River Associates name. For more than 40 years this name has been synonymous with our reputation as the leader in the litigation consulting industry and it is a name which so many continue to use when referring to us. We will also -- we are also going to continue the efforts of our cost cutting strategic business process affecting this program.

We will continue to look for ways to streamline our administrative operations through improved systems and processes. I believe there is potential to further improve the services we provide our consultant, which will in turn allow them to have more time to focus on client relationship management and business development. CRA is positioning itself for long term growth. We have highly skilled and credentialed consultants, a unique combination of functional and industry expertise, a comprehensive service offering and a commitment to keep a steady eye on internal operations and expenses. With that, I will now turn the call back to Jim.

Thanks, Paul. Thanks, everyone, for listening this morning. With that I will ask the operator to open the questions -- the call for questions. Diego?

Thank you, sir. Ladies and gentlemen, we will now conduct the question and answer session. (Operator Instructions) One moment please while we poll for questions. Our first question comes from Jim Janesky with Stifel Nicolaus. Please state your question.

Yes. I have a couple of questions. First, Jim, when you talk in the release and in your prepared comments about business slowing and clients being frozen, do you expect that that trend will continue into the first quarter of 2009? And I guess the question is, at what point do you expect that the pipeline could start to open up?

Well, it probably will extend into Q1, but we do see some of the -- we think that work will start ramping during the course of the year. Some will start in Q1, some later. But we think we are probably -- we think that we will see a gradual improvement over time.

And what do you think will take the pipeline to become more or projects to become unfrozen? Is it -- do you expect the change in the administration to have an effect on that? Do you expect that when ever the financial markets stabilize that the pipeline will get -- I am just trying to get a sense of what you think it will take.

It depends on the areas. Basically what we are talking about is some of our -- it's not every project, it's some of the bigger engagements where the clients are sensitive to the billing rates -- or the rate of billing not the billing rates. In the litigation area I don't think it is a function of the administration right now. And unless the financial situation turns worse we will simply see those litigations start to get hot where we will be billing more. In the business consulting area, we have had some fairly large engagements that have been held off for various reasons, but I think the climate is a factor. We expect to see that loosening up within Q1 is and getting better as the year goes along. So, we do see -- I guess I can't really expand on that. But that should give you a picture.

Okay. So I guess the message as we go into 2009 is that it will be a slow start that we can see improvement, but that the margins year-over-year should get better both on the gross margin as well as the SG&A lines. Is that correct?

Well, to the extent we have revenue growth that should happen, or if we get realization growth with rates, if we hit those numbers it will.

Do you expect that in the first quarter at least that margins could hold up with the -- in the gross margin line? This is on a non-GAAP basis by the way I am really looking at. Do you think that the gross margins can hold around the 37% level?

As I said, if we continue on the same revenue path and we get some rate improvement and we continue to get some cost savings, we should be able the to hold that or do better.

Okay. Thank you.

Thank you. Our next question comes from Andrew [Fones] with UBS. Please state your question.

Yes. Thanks. I have a few questions. First I had a question for Paul if I might. Finance I think you said was down more than 40% year-over-year and a large part of that was due to the reduction in scale of some projects you are working on. Can you just explain to the extent that these clients pulling back on ongoing projects do to the economic environment? These projects actually kind of ramping up. Thanks.

Sure. The scaling back is really in this kind of economic environment. Our ultimate clients are really looking at essential spend. So with the uncertainty of litigation time lines, there's always an attempt to try to delay these expenditures. So, the environment we're in now has pushed out projects into the horizon. With respect to the replacement of some large cases, we have some large litigations that have settled, and we have retentions on some newer litigations, but we are not at the revenue ramp rate that existed for the cases that are just [these].

Okay. Thanks. It sounds like a combination of the two. And Jim, if I may, on the energy group I think you mentioned there is some large new wins in the third quarter there. Then obviously there was the delayed contracts you had to kind of bid on again. I was wondering if you can give us an update on the progress there. Thanks.

No, we don't have to bid again. These are just delayed revenues. So, we are hopeful going into the year that we will see an improvement.

Okay. And then I had a couple on the expense side, I guess. Thanks for giving us the head count guidance. Should we, should we expect a full impact of the cost savings in the third quarter, I think you said $11.5 million annualized.

Yes. We should be able to see that run rate in Q1.

Okay. Great. And then finally on the tax rate, the 41.5%, is that a good rate to assume going forward?

That rate is a reasonable rate, I think. It is driven heavily by, of course, the mix of profitability by jurisdiction. But a rate somewhere in that vicinity, Andrew, is probably a reasonable one to use in your modeling.

Thank you very much.

Our next question comes from Tim McHugh with William Blair. Please state your question.

Yes. First question I wanted to ask, the extra week of revenue, do you have any sense you kind of -- we can get the revenue impact obviously by doing the math. Would there be a margin impact by the leverage of fixed expenses here, and did you do any math around that you can help us with?

We didn't do any real math around it but it shouldn't have changed things much. It was a week of additional revenue and a week of additional expenses, so it wasn't, it shouldn't have any particular impact, and we didn't really do any particular calculations around it.

Okay. And then, on the cash flow, you mentioned you are not getting much of a return right now. You used it to buy back some of the bonds this quarter. What would be your preference looking forward these next few quarters? Are you looking at acquisitions or looking to repurchase more bonds or go back to repurchasing stock as well?

Well, we are considering that and if the price is attractive in terms of the bond price or stock price, but certainly at this point probably bond price, given where the stock price is, we may well be buyers.

Okay. And then lastly, I was wondering if you could extrapolate a little bit on what you are doing from kind of a -- touched on it a little bit but a marketing perspective trying to get ahead of some of the potential demand that we see out there from litigation activity building up in regulatory activity. What type of things are you able to do right now to try and position yourself from a client facing role? Paul touched on it a little bit. I was wondering if you can give a little more information there.

Well, we are driving marketing to the people, to the clients we see as impacted by these various financial crises. We have put together a team, we are generating thought pieces and we are staying in contact with the clients. And as I said, in the major cases, we have already been retained in many of them, and our history is we usually get retained in a major case, not that many that provide these services and we are one of the leaders. We anticipate that the major litigation will be directly involved as these cases play out. And almost -- virtually all, obviously not all of them, but a very high percentage.

Okay. Thank you.

Our next question comes from Paul [Ginochio] with Deutsche Bank. Please state your question.

Hi. This is [Fasu] filling in for Paul. I thought you mentioned that the demand for litigation was weak has to do with clients holding up projects, but you also cited a strong backlog for forensic accounting work. I was wondering if the demands were somewhat tied to each other.

The demand for forensic accounting work has been largely in the international arbitration space and not really tied to the financial crisis right now.

Okay. All right. Thank you.

Thank you. (Operator Instructions) Our next question comes from Jim Janesky with Stifel Nicolaus. Please state your question.

A couple of follow-up questions. Wayne, what was the combination of depreciation and amortization in stock-related compensation.

Let see if we can pull that up for you, Jim.

Okay. I will go on to the next one. Jim, when you talk about being retained and -- but the engagement hasn't started, what are the clients saying it will take to start up the engagements, and what major areas of focus are you being retained, but you said the projects aren't started up in a meaningful way?

We are usually -- in a typical situation in a major league firm usually the defendant the type that work for them, investment banks -- I guess not investment banks anymore. The big banks, the accounting firms, they will retain us to work on the case, it is usually damages related issues, but often the conversations goes until we have a better case of how the case is progressing and through the initial rounds of legal filings, why don't you just get your feet wet, but let's not start any major projects. It's not tied to any specific milestone. When clients are less sensitive to the cost they may just hire us and say, get to work. We are getting more or less, we want to hire you, but let's put off the major work until we have a better case of where the case is going.

Particularly with these large-scale litigations, with the legal team and the ultimate clients really want to put together their complete project team which includes the economic consulting. They're being a premier provider is often times called early on this case. We will get added on to the team just so they can have that composed, but not necessarily start work until very later on. So we are retained, but it is much more of a wait and see as to when work begins.

Okay. And how, how do you expect or how has the significant decline in the price of oil affected, or do you think will affect your energy practice?

We don't think it will be a major impact. There's still a huge amount of work being contracted in the Middle East. If anything, a lot of the work we do will be stimulated, because much of what we are doing is at least working with public sector clients there, helping them figure out how to transform the economy to be less dependent on oil. That's even more of a concern now. So at $140, oil, if things didn't matter now, now things really do matter. So I don't think there has been -- we don't see an impact at the current levels of oil prices. And on the commercial consulting side, again if anything the issues are more difficult for the clients, because at $140 oil, you have to have an analysis on how to make money $40 oil is quite different. So I don't think that level of oil price also have any major downward effect in our demand.

Okay. Thanks. Wayne, did you --

Yes. We did, Jim. Here are the numbers. Depreciation and amortization for Q4 of '08 was $2.2 million and the stock compensation was $1.3 million for Q4 of '08. I'll give you the '07 numbers as well if that's helpful. For depreciation and amortization it is $2.4 million for Q4 of '07 and $1.5 million for Q4 of '07 on the stock compensation. Would you like the full year numbers as well?

No, I have the numbers from the through the third quarter. Thanks very much. That's helpful.

Good.

Thank you. Our next question comes from Andrew [Fones] with UBS. Please state your question.

Yes. Thanks. I had a follow up. For Jim, you have talked in the past about how vocal Obama is being regarding what in his view is being the lack of regulation on the antitrust side. Now he's got his new team in place. Could you talk about perhaps in your opinion what the views are of some of the new people on his regulatory team, and to the extent as to what extent you think those people are going be progressives in pursuing regulatory actions? Thanks.

Well, I don't think the appointments have been made at the level that would directly affect us, but it is clear that his administration, based on what has already been said, is going to be more enforcement oriented. On the merger side, it means that mergers will probably get more scrutiny which means more work for us. And on the litigation side, the agencies will probably be -- or the justice department will be reviewing more cases. So I think it can only be good for us.

Okay. Thanks. And then just one other. If we could get perhaps some guidance on CapEx for this year, please, that would be really helpful.

We haven't given the information out. Andrew, I don't have it right here with me. I think I mentioned during the call what the numbers were for '08. I don't see a substantial change in '09 relative to what it was in '08, but I don't have the numbers right here.

Okay. That's fine. Thank you.

Thank you. At this time we have reached the end of our Q&A session. I will now turn the conference back over to management for any closing or additional remarks.

Thanks, everyone. We look forward to speaking with you on our first quarter fiscal '09 conference call. This concludes today's call.

Thank you. And that concludes our conference call. Thank you for joining us today.