CRA International Inc (CRAI) 2009 Q2 法說會逐字稿

Good day everyone and welcome to CRA International's second quarter fiscal 2009 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 over to Mr. Mackie. Please go ahead, sir.

Thank you, Melissa. Statements made during this conference call concerning the future business, operating results, estimated cost savings and financial condition of the Company and statements using the terms anticipates, believes, expects, should or similar expresses 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 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 in 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. Jim?

Thanks, Wayne. And thank you, everyone, for joining us today. Before I begin, I would like to encourage everyone to refer to today's earnings release for a full reconciliation of non-GAAP items to their GAAP equivalents. Our non-GAAP results excluded restructuring charges, a gain on the repurchase of our convertible bonds at a discount, and the consolidation of the results of our NeuCo subsidiary, for which CRA became the controlling owner again in Q4 2008.

Let me start my comments today by highlighting our ongoing focus on our financial results. Our objectives are to drive top line growth, improve margins by controlling our costs and increase our operating cash flow. Total GAAP revenue for the second quarter of 2009 was $72 million, a decline of nearly $22 million from the second quarter of 2008. Three factors accounted for approximately 50% of our Q2 revenue decline; exchange rate movements, our exit from certain practices and geographies, and a decrease in reimbursable expenses.

The other half of the revenue decline, excluding a $2.6 million contribution of our NeuCo subsidiary, was related to the challenging economic environment and its impact on our practices. Much of this decline occurred in the North American segment of our general industrial consulting practice, where some clients basically shut down their consultant spending activities. While our year-over-year results for the second quarter reflected the weak global economy, we saw important signs of improvement in a number of our practices from the first quarter, as some sizable projects that had been delayed began to move ahead.

During Q2, we experienced increased activity related to large global industrial projects in the Middle East region, an area where we have been focusing our business development areas for several quarters and where our backlog continues to grow. In recent weeks, we have seen a pick up in the activity of the North American segment of the general industrial consulting segment. Our life sciences practice continued its recent momentum with another quarter of double digit growth, compared to the second quarter of a year ago. Our competition practice showed a significant improvement over the first quarter. Client demand in our forensics practice also continued to build. And activity increased substantially in our auctions and competitive bidding practice, which more than tripled in size compared with the second quarter of fiscal 2008 and the first quarter of 2009.

Our utilization rate for Q2 '09 was 71%, ahead of Q1's rate of 68% but lower than the 74% we recorded in Q2 of '08. We were pleased to see positive momentum in utilization sequentially, as a result of our cost cutting and business development initiatives. However, we still have a ways to go before we return to more historical levels of utilization. During the past year, we have implemented a series of steps to right size our work force and further streamline our operations.

As we outlined on our Q1 call, we reduced support head count by 22 individuals and consultant head count by 34 individuals in Q2. During the second quarter, we recorded a restructuring charge of $2.4 million, associated with an employee work force reduction and a revision to an estimate for a previously recorded office closure liability. We expect our actions, combined with the restructuring implemented in Q1, to generate total annualized cost reductions of approximately $8.5 million. This is on top of the $22 million in annualized savings we generated in restructuring activities and divestitures completed in fiscal 2008.

Our aggressive cost cutting initiatives enabled us to keep our Q2 margins relatively stable year-over-year, despite the $22 million drop in revenue. Our gross profit margin on a GAAP basis in the second quarter was 33.6%, compared with 31.6% in the same quarter of fiscal 2008. On a non-GAAP basis, our gross profit margin in Q2 was 35.2%, compared with 34.1% in Q2 '08. Our operating margin on a GAAP basis in the second quarter was 5.4%, compared to 1% for the same period last year. Our non-GAAP operating margin was 9.4% in Q2, compared with 10.3% a year earlier.

Our ongoing cost reduction programs targeting variable spending have been effective, as we have lowered total SG&A expenses by approximately 23% year-to-date, compared to the same period last year on a non-GAAP basis. I should point out that we benefited somewhat in Q2 by a favorable dollar exchange impact on some of our foreign denominated costs. But the key take away here is that; through our cost reductions, lower head count, process improvements, practice divestitures and office down sizings; we have created a far leaner organization.

Our consultant head count at the end of Q2 was 562, compared with 595 at the end of Q1 and 682 at the end of Q2 2008. Our current break down is 169 junior employee consultants and 393 senior employee consultants. Our average net realization on revenue rate per billed hour for the second quarter, increased about 1% when compared to Q2 of last year, after adjusting for significant exchange rate changes in the pound sterling and euro currencies during the past 12 months. The increase primarily reflects the effect of our annual rate increase, which we instituted during Q1, offset by the decline in value of the pound.

Turning to our performance within our practice areas. The unfavorable exchange rate, the exit from certain lines of business and geography and lower reimbursables all had an adverse effect on most of our large core practices. Intellectual property and energy revenue declined approximately 30% year-over-year, while our finance and global industrial consulting practices declined by nearly 40%. The global industrial consulting practice decline was largely attributable to the North American segment of that business, where we experienced a dramatic pull back in work throughout the chemical space.

On the flip side, our overseas business within the global industrial consulting practice delivered an outstanding quarter, growing by more than 25% compared to the first quarter of this year, as we benefited from major Middle East projects. Other star performers included the life sciences practice, which achieved another quarter of double digit growth on a year-over-year basis. Our labor and employment and auctions and competitive bidding practices also had outstanding quarters, both on a year-over-year and sequential quarter basis.

After adjusting for divestitures, foreign exchange rate changes and reimbursable expenses; our competition practice revenue was only down about 5% compared to Q2 '08 and was up approximately 20% compared to the first quarter of '09. Our forensics practice was up more than 20% year-over-year and 25% quarter-over-quarter. Now, I will turn the call over to Paul for a more detailed review of our practices. Paul?

Thanks, Jim. I'd like to provide an overview on the firm's focus to drive top line growth across our practices. During the second quarter, we focused our revenue building initiatives around three primary strategies; recruiting consultants with deep expertise and a wide business network to generate additional revenue across our practices and regions, raising general awareness in the marketplace about CRA, and building strong business relationships with our clients. We were quite active during the past several months in recruiting new consultants with solid books of business across our service portfolios. Our competition practice added three notable hires, all of whom came to us with substantial consulting, particularly in telecommunications.

They include Dr. William Fitzsimmons, who has more than 20 years of telecommunications litigation and regulatory experience and has provided expert testimony in dozens of proceedings. Based in our Oakland office, Dr. Fitzsimmons is the newest senior consultant to join our competition practice. Dr. Douglas Zona, also has joined our Oakland office. Dr. Zona has written and testified extensively about antitrust and competitive bidding issues in a variety of sectors, including telecommunications. Dr. Robert Maness joined our College Station office and expands our academic affiliation with Texas A&M University. Dr. Maness has extensive experience with large scale antitrust litigation and merger analysis in telecommunications, energy, chemicals and pharmaceutical industries.

Our global industrial consulting practice added depth to its organizational consulting capabilities with the addition of Nigel Godley, as a senior consultant in our Boston office. Mr. Godley has spent his entire 40 year career as a management consultant to or as a senior executive in the international oil and gas industries. Prior to CRA, he was the senior strategy consultant to Hess Corporation and was previously Managing Director of Arthur D. Little's global energy practice. The aerospace and defense practice expanded in Europe with the addition of Charles Armitage in our London office. Mr. Armitage was previously head of the European aerospace and defense equity research at Merrill Lynch. He brings a corporate finance perspective to our aerospace and defense consulting practice.

The breadth of the sectors that we work across creates constant opportunity to raise awareness about CRA. Our consultants are regularly sought to speak at leading industry conferences. These opportunities are important to raising and maintaining awareness about CRA, in front of both clients and new business prospects. For example, during the second quarter and at the invitation of the Cleveland International Tax Forum, our transfer pricing practice, led by Vice President Susana Chou, from our Hong Kong officer and Practice Leader Bob Alltop; presented about new transfer pricing requirements in China. They then traveled to the West Coast and hosted a seminar in Silicon Valley, with others from the practice, on transfer pricing issues of concern to high-technology companies.

Our global industrial consultant practice was particularly active at a number of industry conferences in North America and the Middle East. Vice President Chris Ross was on the program committee at the Offshore Technology Conference in Houston. He leveraged his role further by moderating two panels. At the Arabian Power and Water Summit in Abu Dhabi, Vice President John Young was a member of the conference advisory panel and also presented, along with two members from our energy practice, on issues pertaining to the Middle East power and water industry.

In addition, Neil Checker, a Vice President in our global industrial consulting practice in London, is leading our first sponsorship of the ICIS innovations awards, which recognized chemical companies for outstanding innovation in technology and business. Following the 18th annual EU Pharmaceutical Law Forum in Brussels, in which Timothy Wilsdon, a Vice President in our life sciences practice in London spoke. Practice Leader Greg Bell and other Vice Presidents from the practice, used their time in Europe to conduct business development meetings in Brussels, London and Zurich.

Another area of particular focus has been expanding business development with clients and business prospects. We want them to value the relationship with CRA, not only through immediate assignments but also for the insight, education and network we provide concerning topics that interest them. For example, our partnership with the National Institute for Trial Advocacy, Vice Presidents from our competition practice and IP practices recently provided economic testimony in a series of mock trial trainings for attorneys. Our participation gave our consultants an opportunity to work closely with attorneys as their subject matter experts and allowed our consultants to demonstrate their expertise in a deposition setting. The energy practice recently held a dinner and discussion program for more than 100 utility executives, industry-experts and attorneys' where the now Chairman of the Federal Energy Regulatory Commission and an executive from GridPoint spoke about the smart grid. A paper about the smart grid by Vice President Richard Tabors was also made available to attendees.

I would now like to highlight some of the outstanding results we delivered for our clients during the quarter. Our competition practice continued to work on a number of merger and antitrust projects. Examples of our merger related work in the quarter include; Advice to Lufthansa during the European Commission's review of its acquisition of Brussels Airlines and Australian Airlines. Advice to French pharmaceutical company, Sanofi Aventis, in its acquisition of Zentiva, a generic pharmaceutical manufacturer active in central and eastern Europe.

Among our antitrust consulting work, we assisted Comcast with an economic assessment of allegations that geographic clustering of cable operators is anti-competitive. Senior consultant, Robert Larner, testified in a successful price discrimination lawsuit on behalf of Feesers, a broad line food distributer, against Michael Foods and Sodexho. Performance of our intellectual property practice has improved from the prior quarter despite the difficult economic environments. We were retained multiple times by creditors in bankruptcy proceedings to provide expert testimony and valuation expertise about debtors intellectual property.

Our finance practice is actively engaged on projects assisting clients in litigation and arbitration settings, with damage assessments, loss causation issues and valuation issues. The practice has assisted a client with its SEC settlement distribution plan, involving payments totaling about $500 million, paid to over 1 million shareholders. The practice is also working on a matter related to the Foreign Corrupt Practices Act.

Our forensic practice benefited from a number of matters that have gone through trial in the second quarter. Some of these matters are ongoing, with further phases of testimony expected. We have also seen an increase in demand for our investigation services, as fraud has become more visible in the economic downturn.

As Jim mentioned, life sciences had a solid quarter. Practice performance was fueled by work on several new product launches, therapeutic category strategy assessments and new work for health insurers seeking a competitive advantage in the changing US healthcare environment. The practice also completed some work regarding EU sector's inquiry into the pharmaceutical industry. Some of the results of that work were recently presented at the EU Pharmaceutical Law Forum in Brussels.

Our energy practice has been working on several significant energy and power projects in the United States. The practice released the master electricity plan for the New York City, commissioned by the New York City Economic Development Corporation. The practice was also awarded a significant contract by the Southwest Power Pool to study wind integration. This is a follow-on project to the study that we prepared in the fall about the economic benefits of building extra high voltage transmission into the Southwest Power Pool.

And in the Midwest, the practice prepared a cost benefit analysis for the ITC Holding Corp., the largest independent electricity transmission company in the US, which studied the economic impact of a proposed 3,000-mile green power super highway, designed to carry wind power from the upper Midwest to load centers in Chicago and Minneapolis. Overseas, the energy practice has negotiated expanding scope for its work in the UAE.

The continued debate by the Obama administration and the US Congress on proposed cap and trade legislation has created steady demand for CRA's services in climate and sustainability. We were retained by the Coalition for Affordable American Energy, as well as the National Black Chamber of Commerce, to prepare studies about the economic consequences of the bill. In addition, one of our experts testified before the US Senate Committee On Finance and the US House of Representatives Committee On Energy and Commerce, and Subcommittee On Energy and the Environment.

Global industrial consulting continued to experience significant market difficulties, as a result of the economic downturn, in both North America and Europe, as oil companies face low oil prices and high uncertainty and chemical companies face significant reductions in demand. In North America, the practice was hit particularly hard by a decline in the chemicals industry, which have historically accounted for a significant portion of the practice's revenue in the region. The dynamics in Europe were similar to North America, with the exception of improvements in the utilities sector, which is typically less cyclical. We have also restructured our German operations to better align it to our focus and as a result, we're starting to see new traction in that market.

We saw significant improvements in the Middle East, momentum from the projects that started to materialize in the first quarter continued into the second quarter. We began several sizable projects in Bahrain, Jordan and Saudi Arabia. Examples of our economic and corporate development work in the Middle East included; The recent award of several contracts in Saudi Arabia for industrial development supports, as well as for private industry, which will result in more than $7 million in revenue through the end of the fiscal year. Assisting Bahrain National Petroleum Company with the development of a strategy for privatizing its retail network gas station. Advising the Government of Jordan, with a team of consultants from our London and Bahrain offices, on the privatization and regulation of Jordan's downstream petroleum industry.

In our chemicals and oil gas sectors, we have continued to support our clients' strategic cost management during the economic downturn, as well as ongoing corporate strategies and implementations. For example, we are negotiating a new joint venture for a leading plastics manufacturer. The business environment remains difficult but in our client discussions, we're starting to see signs of improvements.

Several of our smaller entrepreneurial practices continue to make great strides and generate solid revenue for the firm. Our auctions and competitive bidding practice continues to extend its services to clients in a range of industries. We were retained by Ocean Spray to develop and manage its Internet-based trading platform, believed to be the first of its kind in fruit concentrate markets. We will also manage the trading session, which are expected to begin in the third quarter. We also completed an auctions for First Energy Ohio Utilities that procured over $7 billion in electricity for consumers, for customers in Ohio. In addition, the practice continues to work on ongoing auction assignments from Ontara, RWE and others.

Financing economics performance for the second quarter continues to show strength in North America. We continue to work on a number of fair lending assignments and issues in credit and compliance risks in primary and secondary mortgage markets. In Europe, we were commissioned by the City of London Corporation to contribute to the debate on the effectiveness of enforcement in capital market regulation in different countries, in light of the financial crisis, and the regulatory implications resulting from the globalization of capital markets. During the quarter, labor and employment practice's growth resulted from the work on a number of wage and hourly litigation projects, EEOC investigations and affirmative action programs. With that, I will turn the call over to Wayne for his financial review. Wayne?

Thanks, Paul. Briefly recapping our results. Q2 revenue declined approximately 23% to $72 million, compared to $93.8 million for the second quarter of fiscal '08. The reconsolidation of NeuCo contributed approximately $2.6 million to our Q2 '09 GAAP revenue. As Jim mentioned, the main influences on our Q2 revenue performance were comparable to what we experienced in Q1. The macro economic environment continues to present us with a variety of challenges due to stalled litigation, project delays and a lack of spending in certain industries, such as the US chemicals markets.

In addition to the economy, three factors that affected our year-end, year-over-year revenue performance include; $5.6 million in foreign exchange effect; $4 million related to divested businesses and geographies we exited; and $2.2 million in lower client reimbursables. In total, CRA's Q2 international business represented 24% of total revenue versus 21% in Q1 and 23% in Q2 of last year. As we outlined in this morning's release, our Q2 GAAP results include $2.4 million in pretax expenses. And related income tax effect of $700,000 associated with an employee work force reduction. And a revision of an estimate for previously recorded office closure liability. A $300,000 pretax gain related to the repurchase of $7 million of our convertible bonds at a discount. And a small loss from NeuCo.

Second quarter margin on a GAAP basis was 33.6%, compared to 31.6% last year. Q2 gross margin on a non-GAAP basis increased to 35.2%, compared to 34.1% in the second quarter of 2008. In light of the $24.5 million drop in non-GAAP revenue year-over-year, we are very pleased to have improved our gross margin. Reimbursables were $9.8 million in Q2 or 14.1% of non-GAAP revenue, as compared to $12.3 million in Q2 of a year ago or 13.1% of revenue. Reimbursables declined $2.5 million year-over-year but increased by 100 basis points as a percentage of non-GAAP revenue. Reimbursables carry little or no margin impact.

Second quarter GAAP SG&A expenses were $20.3 million or 28.2% of GAAP revenue. On a non-GAAP basis, excluding the restructuring items and the effects of NeuCo, SG&A expenses were $17.9 million or 25.8% of revenue in Q2, compared to $22.4 million or 23.8% of revenue on a non-GAAP basis in the second quarter of 2008. On a year-to-date basis, SG&A costs decreased nearly 23% on a non-GAAP basis, as a result of our aggressive approach to lowering our fixed cost structure and limiting our variable costs, such as labor, travel, recruiting and commissions to nonemployee experts. We will continue to closely manage our SG&A expenses.

On a GAAP basis, operating income was $3.9 million for the second quarter or 5.4% of revenue. Non-GAAP operating income in Q2 was $6.5 million or 9.4% of revenue. This compares with GAAP operating income of $900,000 or 1% of revenue and non-GAAP operating income of $9.6 million or 10.3% of revenue in Q2 of '08. The second quarter non-GAAP revenue reduction of $24.5 million was offset by cost reductions of $21.4 million in cost of services and SG&A areas. The cost savings, overall, reflect staff reductions, restructuring efforts, high operating efficiencies, and other cost control initiatives we've discussed today.

GAAP interest and other expense was $258,000 in Q2. Non-GAAP interest and other expense was $520,000 in the second quarter, reflecting the exclusion of a $298,000 pretax gain related to the purchase of $7 million of our convertible bonds. This compares to interest and other income of $72,000 in the second quarter of fiscal 2008. The continued interest rate environment and our decision to be with conservative with where we invest our cash, typically in Treasuries, has resulted in a decrease in interest and other expense this quarter. We will continue to be prudent with our cash and keep it in safe investments until the overall market environment improves and markets stabilize.

Our GAAP tax provision for the quarter was $2 million or a Q2 tax rate of 53.4%. Our non-GAAP tax provision for the quarter was $2.7 million, resulting in an effective tax rate of 44.8%, compared to 54% for the first quarter of 2009. The improving Q2 tax rate reflects improved foreign operations compared with the first quarter of this year. Continuation of the improved mix of business profits across geographies would result in a lower tax rate as we move through the balance of fiscal 2009.

Our Q2 2009 GAAP net income was $1.7 million or $0.16 per diluted share, compared with GAAP net loss of $512,000 or $0.05 per diluted share for the same period of 2008. GAAP net income in the second quarter of fiscal 2009 includes; Pretax expenses of $2.4 million and a related income tax effect of $700,000, associated with an employee work force reduction and a revision of an estimate for a previously recorded office closure liability. A $300,000 pretax gain related to the repurchase of the Company's convertible bonds at a discount. And NeuCo results. GAAP net income in the second quarter of fiscal 2008 included pretax expenses of $8.7 million related to employee separation; office closure; and divestiture of the majority of the Company's Australia and New Zealand practices. Excluding these item, non-GAAP net income for Q2 2009 was $3.3 million or $0.31 per diluted share, compared with Q2 2008 non-GAAP net income of $5.2 million or $0.48 per diluted share.

Turning to the balance sheet. Billed and unbilled receivables in Q2 were $86.5 million, compared to $82.2 million at the end of Q1. Current liabilities at the end of Q2 were $63.8 million, compared to $111.5 million at the end of Q1. Total DSO in Q2 was 98 days. This consists of 35 days of unbilled, and 63 days of billed, compared with the 100 days reported in Q1, which consisted of 35 days of unbilled and 65 days of billed. Our goal is to continue to keep our DSO below 100 days.

Cash and equivalents stood at $89.4 million at the end of the second quarter, compared with $119.3 million at year-end. Net cash used in operating activities was $35.7 million in Q2, compared with a contribution of $5.6 million for Q2 2008. The drop in our overall cash position and operating cash flow in Q2 relates to the fact that the vast majority of our annual bonus payments were made in Q2 this year versus in the first quarter of last year; the repurchase of $7 million of our convertible bonds at a discount; and the payment of $10 million in connection with a past acquisition.

Our capital expenditures totaled approximately $600,000 for the second quarter, compared with $2.2 million for Q2 2008. Depreciation and amortization expense was approximately $1.7 million for Q2, compared with $2.2 million for Q2 of last year. Share based compensation expense was approximately $1.5 million for Q2, compared to $1.6 million for Q2 of last year. With that, I'll turn it back over to Jim.

Thank you, Wayne. We remain cautiously optimistic about our outlook. Overall conditions have remained challenging but we are experiencing an improving business environment in a number of our practices and geographies. We are experiencing solid growth in such practices as forensics, auctions and competitive bidding and labor and employment. Within our larger practices, we've experienced significant growth in certain geographic areas, such as our global industrial consulting business in the Middle East. In addition to our competition, transfer pricing and intellectual property practices registered revenue gains in the second quarter compared to the first quarter of 2009.

The longer term trends, we believe, are generally positive for us but in the near term, the recession continues to weigh heavily on many areas of our business. Given the uncertain nature of worldwide legal, regulatory and business conditions currently, it may take some time for client demand to fully rebound in litigation. As I've noted on prior calls, our litigation pipeline contains a number of potentially major cases relating to the capital markets meltdown but they are moving forward slowly. Within business consulting, it is a similar story, with projects moving slowly as clients try to limit their near term spending. However, we continue to see strong business conditions in the Middle East and we are starting to see improved backlog due new project awards in our chemicals and oil and gas sectors in North America.

We're focused on boosting utilization, improving our margins and managing our resources. Obviously, at 71% utilization, we still have significant capacity to grow our top line and further improve margins. While we have significantly reduced our head count in recent quarters, as Paul highlighted, we are continuing to hire with an emphasis on recruiting senior revenue generating consultants across practices where we see the greatest near term demand.

Let me conclude my comments this morning by saying that we believe we are successfully weathering the current recession and preparing ourselves for the eventual rebound in our key markets. We now have a very lean organization with a much lower fixed cost structure. We've improved many of our internal processes in an effort to manage expenses. We have a strong balance sheet with a cash balance of nearly $90 million. We are continuing to concentrate our resources where we see the most promising opportunities in the near term. We are confident that when business conditions improve and work currently on hold begins to restart, we will be positioned to rapidly grow our profits as revenue growth returns. And with that, I will ask the operator to open the call for questions. Operator?

(Operator Instructions). Our first question is from Jim Janesky with Stifel Nicolaus. Please state your question.

Yes, good morning. Jim, can you just comment on two things? First is, do you think that the environment is better in terms of backlog being converted into revenues in the second fiscal quarter versus the first fiscal quarter? And second, is can you comment on seasonality expectations for the August quarter with respect to average weekly revenue run rates? You did about $5.8 million this quarter. Could we expect that to improve sequentially or will there be seasonality for the summer months?

Well, first, in answer to the first question, we do see some improvement in the general business climate, particularly in, for example, some of our business consulting verticals, such as chemicals. And we think that the legal market is a little improved, although it's still not back to where it used to be. In terms of the seasonal effects, we are approaching summer and people do take vacations, both our employees and our clients. So there should be a seasonal impact on revenue generation rate, particularly in August. That's just a fact of life in this business.

Okay. And do you have any expectations, you have made some recent significant new hires, are those folks expected to hit the ground running right off the bat? Will there be a bit of a delay in the transition? And what -- how could that affect gross margins in the near term?

Well, most of the new hires we make, I think, are designed to produce revenues fairly quickly. That's obviously not going to true for everybody we hire but we're trying to be selective in hiring in situations where we think we will have the increased revenues fairly quickly. So, that's our intent. There will probably be a mix in terms of the actual results.

Okay. And then last question, Wayne, I'm trying to reconcile the non-GAAP $520,000 charge in the interest and other line. Again, non-GAAP, excluding the bond, that when you sold the bonds -- or bought back the bonds, I'm sorry. Because it seems to me that what you have in cash, even at T-bill rates, should roughly offset your interest expense. So, I'm just trying to get to the $520,000 charge.

Jim, the return rate on T-bills and the like is very low, as I'm sure you know. So, it actually isn't offsetting the interest. In that same line, would be general translation -- or excuse me, exchange effects losses but really, the basic interest rates are what's driving it.

Okay. But that includes foreign exchange losses as well?

Yes.

Okay. Thanks.

Thank you. Our next question is from the line of Tim Mchugh with William Blair. Please state your question.

Hi, it's Joe Alkire for Tim Mchugh. I wanted to dig a little deeper, if I could, into the improvement in your competition practice. Was the improvement there during the quarter driven more by M&A engagements or is the DoJ just beginning to get more active?

Yes, most of this could be M&A engagements, as well as private antitrust but the M&A side of the business was fairly strong.

Okay. Switching over to your international operations, are you guys break even now there or is just the magnitude of the loss much lower?

I'm sorry. Could you repeat the question?

Regarding the profitability of your international operations?

Yes.

Are you now break even there or is just the magnitude of the loss much lower?

We're very close to break even, possibly slightly profitable for Q2. And so, we're very encouraged with the trend there. It coming, obviously, from a loss earlier in Q1 and in prior years.

Okay. And then lastly, some of the large projects in the Middle East, are these longer term projects in nature or is just the demand environment better right now?

Well, the projects there tend to be longer term by nature because they tend to be fairly big contracts. So the duration of an individual project is longer than the average for the Company. Many of these would be, in some cases, annual or multiannual contracts, multiyear contracts. And we're finding it's a healthy environment for us. We've been on the ground there for awhile. We have brand name recognition and good client referrals. So, we think it's a good environment at the moment.

Okay. Thank you.

Our next question is from the line of Andrew Fones with UBS. Please state your question.

Yes. Thanks. I was wondering if you could help us understand the backlog relative to perhaps -- so give us some historical context around your current level of backlog? Would you say it is higher than it has been in a couple of quarters? Is it higher than it has been in a long time? Just how should we think about that?

Well, I should -- I think I need to answer that by saying we don't compute a backlog number because it's not really a relevant concept for almost all of our business. The litigation business doesn't have contract backlog. It's by the hour. So, we have a feel for the business but we don't have -- we don't calculate backlog numbers.

Sorry, Jim, I understand you don't have an actual number but in terms of thinking about the number of projects that you've been retained on and the potential size of those projects, just conceptually, how would you think about that relative to where you've been in the past?

Well, we certainly have a large number of projects in which we've been retained and many of them could be quite large. It's hard to quantify that but I think in terms of the projects that we have, there's a potential for a lot of work but it doesn't always get translated into actual revenue.

Okay. And in terms of during the quarter, the month-over-month trends, did you see business improve as you went through the quarter or was it kind of more lumpy? What did that trend look like?

I think the trend was basically positive throughout the quarter. So, it was sort of an improving trend.

And that improving trend, was that driven, do you think, primarily by new business wins or was it just the unfreezing of work that had previously been delayed?

I'd say some combination of both.

Okay. And then, you obviously saw a nice improvement in utilization sequentially. Can you give us a sense of where you ended Q2?

I missed the last phrase.

Sorry. I was wondering if you could give us a sense of where utilization was at the end of the quarter, please?

We don't generally report that. We do -- we are working to get utilization from where it is now but that's obviously an aspiration but we're not satisfied at 71%.

Okay but given the improving trend through quarter, we should perhaps assume it was a little higher than the 71% at the end of the quarter? We may see some something a little higher than 71% in the second half of the year?

That is certainly our objective.

Okay. Obviously, the seasonality noted earlier. And then if you could, just touch on if you paid signing bonuses on the hires and how you structured perhaps the compensation there a little bit? Thanks.

Well, it depends on who the person is. There are times that we have a signing bonus. It really depends a lot on the nature of the person. But we try to have our arrangements fairly incentive-friendly for the Company.

Okay. And then, my last one, thanks, is just in terms of head count plans, you obviously have mentioned you're going to continue to recruit, where we should expect head count to perhaps trend towards the end of the year? Thanks.

We're not doing a lot of recruiting at entry levels. In fact, I think our strategy is to hire only after we see we actually have demand. So, we are recruiting at senior levels. That by itself wouldn't lead to a lot of additional head count but as work comes in, we will be able to hire behind the work. So I would not expect head count to show much positive growth, at least for some months, because we want to see utilization going up before we do any widespread hiring.

Great. Thank you.

Thanks.

(Operator Instructions) Our next question is from the line of Sean Jackson with Avondale Partners. Please state your question.

Good morning. As far as the different verticals, you mentioned several that are seeing an uptick, can you talk about those that are still kind of in the dumps and have yet to see any improvements quarter-over-quarter?

Well, I think most of our verticals are doing fine. We're more of a functional-oriented Company. So the important verticals for us are chemicals and petroleum, third, general industrial consulting and that's basically been an up trend. There's the energy sector, utilities, where we have not been experiencing rapid growth but work continues to come in. And then, we have the more smaller verticals, aerospace and defense. Also, pharma and the life sciences, which has been pretty strong. Aerospace and defense has been fine. There's nothing that's bad. They're all sort of in various stages of recovery.

Okay. And can you just comment on the Mid East again, as far as, what has been the catalyst for that business and your optimism for that business going forward?

Well, I think we've spent a long time in the Middle East, going back to the early part of this decade, building strong client relationships. We have been on the ground there for quite awhile. We have shown a commitment to the region, which is beneficial towards getting business. And there's a lot of work to be had in the Middle East. And I think we're starting to capitalize on our relationships.

Okay. And what was the bill rate on a percentage basis versus the first quarter? I think you mentioned it year-over-year but I didn't get it for the -- compared to the first quarter.

We haven't published that at this point. I don't have it here with us, unfortunately.

Okay. Was it higher? Can we assume that, considering it was a little higher year-over-year?

We increase our rates essentially once a year and it's at the beginning of the fiscal year, which is December for us. Now, there does tend to be a little bit of a lag in implementing it across all of our clients. So, there should be some tendency for us to be up a bit in the second quarter from the first quarter. I think the bigger this year has been the exchange rate movements because we put in a fairly decent rate increase but then it was offset by the fact that the pound was worth less this year than it was at a similar point last year. So, some of the bill rate affects what will be dependant on the currency translation but we basically have a one-time rate increase that occurred at the beginning of our year.

Okay. It sounds like, on the cost reduction side, that you guys have completed a lot of the heavy lifting, as far as that is concerned. Is that correct?

I would say the heavy lifting is maybe a fair but we're not done.

Okay. Would those be again to eliminate positions or is there other things that you can do to reduce those costs?

Well, we're looking at improving process, reducing our outside spend, making sure we're getting the best deals possible when we buy services, improving the efficiency of operations internally.

Okay. And lastly, on the tax rate, I think you mentioned that there could be an improvement in the tax rate considering where the international operations are going. Is that an improvement over where the current tax rate was in the second quarter or again improvements over the prior year?

Both. And just to be clear, what we have, we've had some past losses in our international operations. And so, as a result, we have some net operating loss carry forwards. As those operations, those tax jurisdictions, countries become profitable again, they will have a bit of a tax holiday as those NOL's are earned out. So, that will necessarily result in a lower effective tax rate for the Company as a whole.

Okay. All right. Thank you.

Thank you. At this time, we have reached the end of our question-and-answer session. I will now like to turn the conference back over to Mr. Jim Burrows for any closing or additional remarks.

Thanks, everyone. We look forward to speaking with you again in our third quarter conference call later this year. In addition, we will be Webcasting our presentation tomorrow at the UBS Investor Conference in New York and Thursday at the Blair Conference in Chicago. And that concludes today's call.

That concludes our conference call. Thank you for joining us today.