Resources Connection Inc (RGP) 2003 Q4 法說會逐字稿

Good day, everyone and welcome to this Resources Connection fourth quarter 2003 Earnings Conference Call. This call is being recorded. At this time for opening remarks and introductions.

I'd like to turn the call over to the CLO, Ms. Kate Duchene. Please go ahead.

Thank you, Operator. Good afternoon, everyone, and thanks for participating with us today. Joining me are Don Murray, our Chairman and CEO and Steve Giusto, EVP of Corporate Development and CFO. During this call, we will be providing you with comments for our results for the final quarter of fiscal 2003. By now you should have a copy of Today's press release in front of you. If you need a copy or are unable to access the copy on our Web site please call Margaret porter at 714-430-6363, and she'll be happy to fax a copy to you. Before introducing Don Murray, I'd like to read an important announcement about certain statements that we may make during this call. Specifically, we may make forward-looking statements

In other words, statements regarding future events or future financial performance of the company. We wish to caution you that such statements are just predictions and actual events or results may differ materially. We refer you to our 10-K report for the year ended May 31, 2002 for a discussion of some of the risks, uncertainties and other factors such as seasonal and economic conditions that may cause our business results of operations and financial condition to differ materially from results of operations and financial conditions expressed or implied by forward-looking statements made during this call. I'll now turn the call over to Don Murray, our chairman and CEO, to give an overview of the quarter and the year ended.

Thanks, Kate. Welcome to our year-end Conference Call for fiscal 2003. Resources Connection is a professional services firm found as a part of one of the big (ph) and in the United the states, we're part of Deloitte & Touche, we have expanded internationally by acquiring a practice in UK from Ernst & Young and we'll also talk today about our expansion in Australia. We serve companies' internal consulting needs on a project basis. We also serve our clients with internal audit services and procurement services. We provide our services to clients through 51 domestic offices and as of today, 13 international offices. We are best known for accounting and finance services, and have added additional service offerings to meet our clients' needs.

Let me summarize the operating results in our fourth quarter fiscal 2003 and for the year ended May 31st, 2003. As indicated in our press release today, revenues for the quarter were $59 million. This revenue is higher than the fourth quarter of a year ago by 37% and is sequentially higher by 20%. The fourth quarter included an extra four days of revenue this year so on a comparable day basis, growth was 27% year over year and 12% sequentially. Revenues for the year totaled $202 million, for a growth rate of 11%. Steve will provide some additional detail of revenue trends during the quarter in his review of operations later. There are several contributors to our revenue results.

First, we have been successful in securing large projects at major companies in the midst of restructuring. Second, some demand was caused by gaps in the client's staff because of previous downsizing. And third, despite the SEC's delay in the implementation of Sarbanes-Oxley, we still see requests for assistance from companies faced with implementing processes around that law and also their heightened concern over the internal control environment. We continue to experience stronger demand from our larger clients than from the middle market. We believe this validates our strategy of focused marketing to larger big 4-type clients. During the fourth quarter, we continued to see the impact of significant investments we have made in our business. Resource audit solutions, which provides comprehensive risk management and internal audit solutions to our clients, is a business particularly appropriate for the current issues facing corporate leaders as they adjust to a new and more attentive corporate governance environment. We have chosen to build this practice organically, yet our revenue run rate from this business is growing. We have a substantial number of significant opportunities not yet closed but in the pipeline.

Most have to do with the effort companies need to comply with Sarbanes-Oxley. Revenue generated from RAZ during the quarter was more than double that of the third quarter. Revenues from our 50 largest clients represented 43% of total revenues for the year. 67 clients contributed 50% of revenues during the year, and our largest client was about 3% of revenues. Of our top 50 clients from the previous fiscal year, 49 still remain clients at the end of the year. This year, we have 36 clients where our revenue exceeded a million dollars compared to 24 clients with a million dollars in services a year ago.

When we had similar success in the $500,000 level, suggesting that our focus on larger clients and opportunities is working well. We previously announced two new international expansion opportunities in line with our expressed desire to be an alternative to the Big 4 for work within our core competency at the see. These new investments are part of our strategy of acquiring business units from the Big 4 that may not be appropriate for them because of Independence concerns. These opportunities rarely present themselves.

In Australia, we had helped Deloitte start Resource Practice when we were part of that firm. While initially uninterested in selling it to us in 1999, increasingly difficult regulatory environment caused the partnership to reconsider its position. In June, we completed the acquisition of the assets of that business, and have been able to reunite the Australian practice with ours. We paid $1 million U.S. for the Australian practice that generated about $2.5 million U.S. of revenues in the past year out of two offices in Sydney and Melbourne. We are hopeful of growing the business now that Independence and scope of services will no longer be an issue.

Later we'll discuss our acquisition of the interim executive business of the Dutch Ernst & Young practice. Now here is Steve with some additional information on the results of the fourth quarter.

Thanks, Don. Revenues totaled $59 million for the quarter versus $43.3 million in the year-ago quarter and $49.2 million in the third quarter of this fiscal year. These results represent year over year growth of 37% in a sequential increase of 20%. Included in revenues for the 2003 fourth quarter is $2.7 million from TPC. Growth without TPC revenues and the extra week of revenue in the fourth quarter was 22% year over year. Revenue for the year totaled $202 million, an increase of 11%. Both the Q4 revenues and the annual revenue are slightly higher than we expected during our last Conference Call. The average VP revenue for the quarter revenue was $4.2 million, ahead of quarter three. Average slightly above $4.1million for non-holiday week. Average weekly revenue during the second quarter was $3.9 million and $3.3 million in the first quarter.

On that basis, we are pleased that the weekly revenue growth we experienced earlier this year has continued for three quarters. Excluding the Memorial Day week, revenues per week during Q4 ranged between $4.0 and $4.5 million. The last three weeks of the year were not as strong, and we ended the quarter at a run rate of $4.2 million per week. Since the end of the year, the weekly run rate has been about at $4.3 million per week. Were we to continue around that pace through the quarter, revenues would be between $55 and $57 million. Gross margins during the fourth quarter were 40.2%, slightly better than our 40%target. Gross margins were 39.8% for the year, compared to 40.2% a year ago. This slight reduction in annual gross margin reflects the combined impact of low conversion fees and a lower Gross margins we experience in TPC and the international practices. Gross margins excluding those factors would have been 40.2% for the full year and 40.2% a year ago, suggesting that the primary accounting and finance, IT and human capital services continue to enjoy gross margins at or above our expectations, even with declining conversion fees.

Associate head count at the end of the quarter was 1,175 compared to 1,181 last quarter, and 1,060 at the end of the 2002 fiscal year. Now to the other components of our fourth quarter and year-end financial results. For the quarter, our spending levels were consistent as a percentage of revenues with the previous quarter. We continue to increase targeted spending in the marketing area, invested in our newest services and strategic hires, and had another full quarter of costs from TPC. We added a net total of three professionals to our internal management team. SG&A for the quarter was $16.5 million and was $58.2 million for the year. SG&A as a percent of revenue was 28% for the final quarter and 28.8% for the year. In the comparable period to fiscal 2002, SG&A as a percentage of revenue was 30.4% in the last quarter of fiscal 2002, and 27.9% for the entire fiscal 2002 year. We endeavor to balance investments in our future with appropriate short-term profit margins because many of our newer initiatives and office openings are not capitalizable, they impact current earnings even though their expected return is in the future.

Depreciation and amortization were $535,000 for the current quarter versus $352,000 a year ago, reflecting the increased amortization from the TPC acquisition. The increased charge will be $140,000 per quarter through Q2 of fiscal 2004, and $75,000 per quarter through Q3 of fiscal 2006. Interest income was $238,000 for the quarter versus $327,000 a year ago. Interest income for the year was $1,077,000. Invested cash earned approximately 1.6% during the quarter and for the full year. There was no interest expense this year. Interest income continues to be negatively affected by the very low interest rates available in current market conditions. Our pre-tax margin for the fourth quarter was 11.7% compared to 10.3% in the year-ago quarter. Pre-tax margins for the year were 10.5% versus 12.2% in fiscal 2002.

The overall decrease year was due to the investments as previously mentioned, higher amortization, low conversion fees, and a result in small decline in gross margin in the current year. Earnings for the quarter were $4.1 million, or 18 cents per share, versus $2.7 million and 12 cents per share a year ago. For the year, we earned 55 cents per share. Now let me turn to our balance sheet. Cash and Investments at year-end was $68 million, demonstrating continued strong cash flow performance. Even after completing two international acquisitions, we will have about $35 million of available cash. Receivables at quarter-end were $26.6 million, and day sales outstanding at quarter-end improved to 42 days compared to 44 days at the end of Q3. This continues a three-quarter trend of improved DSOs. Additionally, we collected $2 million from one of our largest clients a day after the year ended. Overall, we are pleased with the strength and soundness of our balance sheet.

Now let me return the call to Don for some additional comments.

Thanks, Steve. Let me recap and provide a few summary thoughts about our year, and then we'll discuss our acquisition of ETM. We have seen some recovery in our business over the last few quarters in our revenue and profit trends are positive. The investments we made during the worst part of the recession are beginning to show returns. Then would we expect the recent acquisitions to also generate new returns for our shareholders. While we are optimistic about the growth opportunities in all of our geographic and service areas, we are still cautious about the economic environment. Therefore, we do not believe it is useful at this time to provide specific revenue or earning guidance for the coming year other than to say that we have budgeted internally for some reasonable organic revenue growth regardless of the economic climate.

For the coming quarter, as Steve mentioned, we are running at a pace of about $4.3 million a week, which would mean revenues in the $55 to $57 million range. Revenue in the first quarter will be negatively impacted by the delay of Sarbanes work, but I think that could be a net positive overtime. Today, we closed our previously announced acquisition of the Ernst & Young interim executive business in the Netherlands. We paid 26 million euros in cash for this business to have revenue for the year-ended June 30th, 2003 of approximately euros 50 million, as represented to us by the sellers. We expect similar revenue levels for fiscal 2004,but will only consolidate 11 months of operations during our fiscal year. We expect this deal to be accretive for the current fiscal year. We paid less than six times expected cash flows for the business. We feel this acquisition gives us a critical mass in management and people to cautiously expand in Europe in future years. We believe this is a strong strategic move for Resources with potentially significant financial impact for us as well. Our client base has made up of large multinational companies with operations throughout the world.

To serve their needs globally, we need to have a strong European presence. ETM is a leader in the Dutch market and has been instrumental in opening similar practices for Ernst & Young elsewhere in Europe. With the Dutch and the UK practices serving as the foundation of our European growth. We expect to be able to address our clients' needs throughout the region. Furthermore, ETM's business has been hurt during the last year by tighter restrictions on services that could be provided to Ernst & Young audit clients. And as ETM becomes independent of E&Y, there will be no such restrictions, and this could lead to future revenue growth.

While ETM operates in a broad range of professional services, a significant majority of its revenue comes from accounting and finance assignments. This obviously translates well with the resources model. As an example, we have already been engaged by clients in the United States to help them with financial or internal audit needs in and around the Netherlands. We feel the cultures of our organization are very similar and both firms share that Big 4 service heritage that has been instrumental in our success. Now Steve will provide some additional financial information about ETM.

Thank you, Don. ETM revenues for the nine months ended March 2003 were approximately euros 39 million or $44 million. Revenues for the fiscal year ended June 30, 2002 were euros 53 million or $71 million. The full financial results for those periods will subsequently be included in filings with the SEC. Now let me give you additional information about the remainder of the P&L, as well as other metrics about the business model. ETM has a strong operating model that is similar, but not identical to Resources model. While the majority of revenue is generated by contractors who have a variable cost, similar to Resources' associates, there is also a smaller component of the work force that is paid on salary. This hybrid model is necessary to address the more difficult employment environment in the Netherlands. Of a total fee earner work force of about 300, about one-third are salaried employees and the remainder are paid by contract. We believe that adding a small number of salaried associates through this acquisition to the overall Resources model will not change our model significantly and allows our variable cost model to exist in the Dutch labor environment.

The ETM operating model historically generates gross margins in a 32 to 35% range with operating margins of 7 to 10%. However, ETM did not achieve those types of operating margins in our most recent fiscal year. Operating income for the first nine months of the year was about euros 250,000, which is $283,000. During this period, due to a difficult economic environment exacerbated by deterioration in work for E&Y audit clients as a result of tighter restrictions, revenues were below management's expectations. Therefore, ETM downsized into the third quarter charge of euros 640,000, $720,000, and an additional charge of euros 650,000, $730,000, in the fourth quarter to reduce the size of the business to reflect current operating conditions. ETM has also incurred other nonrecurring charges associated with transitioning out of Ernst & Young a total of about euros 400,000, or $450,000.

In analyzing the potential of this transaction, we took these financial activities into account, and we were impressed that management dealt decisively and effectively to position the business for future profitability. The impact of leaving Ernst & Young and of the restructuring is expected to lower future costs by approximately euros 2.4 million or $2.7 million in fiscal 2004. ETM has also operated under an arrangement with its parent called a service and referral fee. This fee was used to essentially pay the profits of ETM into the parent. The service and referral fee total of euros 5.5 million or $6.2 million in the year-end of June 30, 2002, and was a credit of euros 679,000 or $765,000 in the nine months ended March 31, 2003. Because this arrangement ceases when we own ETM, we also considered this arrangement in determining the purchase price. ETM is expected to provide similar positive cash flow characteristics as the Resources model. Cash flow from operations has been positive, and after an initial period after the transaction, when working capital balances will be restored, we expect the business to be self-financing. ETM will increase our balance sheet by about 10%, most of which is receivables.

Historically, the company has billed and collected efficiently with six to six and a half weeks of receivables and experienced very low bad debts. From an overall balance sheet perspective even after this transaction, Resources is very well capitalized and will have available casually liquidity of about $35 million. We will be providing additional information about purchase price allocation and expect future amortization costs from this acquisition in the next few months. Currently, investors should expect the charge of about a penny a share for costs associated with the ETM purchase. When management determined that it was more likely than not that this transaction would close, we protected against foreign currency risks as the Euro was on a steady rise against the dollar. Because generally accepted accounting principles do not allow hedge accounting for such transactions, the charge for this hedging transaction of $318,000 will occur during the current quarter.

Now we would be glad to answer your questions.

Today's question and answer session will be conducted electronically.

We'll go now to Andrew Steinerman with Bear Stearns.

Hi there. When we're talking about operating margin targets for ETM, are we suggesting that we could get back to the historical operating margin target, 7 to 10% as you mentioned, or do you think those could be higher in the Resources family?

Andrew, this is Don. For the first year, we're not targeting anything higher in future years, it depends on our level of investment throughout Europe as we open offices. I definitely think that, you know, just like we've expand expanded in the U.S., we will try to balance our operating margin targets with our investment goals.

Right.

So I would say that, you know, what Steve has said is probably what we're going to aim for this fiscal year.

Ok. And Steve, the penny a share, I didn't quite catch it, what's the ETM charge for a penny a share? Is that amortization of intangibles?

No that was cash charges for a hedging transaction -- Euro.

How about on the subject, is there going to be amortization of intangibles here?

Yes, although we don't have and won't have until we complete the allocation of the purchase price the actual numbers, we estimate that it will be about $280,000 per quarter, and that's what we're going to book in this first quarter, and then when we complete the allocation of the purchase price, we will adjust to what the actual number should be.

And how long do you think that amortization stream is going to go at that rate?

Oh, you know, our experience with past acquisitions is at about 15% to 20% of the acquisition price gets allocated to identifiable intangibles, and the average life is about five years.

And when you said accretive in the first year, you included this amortization, of course?

Yes.

Thanks for the comments. Appreciate it.

We'll take our next question today from Greg Capelli with CS First Boston.

Hi Guys, Greg and George. I think, Steve, just a quick one to start off with. How are you guys defining -- you said six times cash flow. Is that basically EBITDA or how are you defining that?

I think that's a fair assessment of how we would calculate cash flow, Greg.

Ok. And then on the weekly revenue trends that you talked about, so basically the guidance suggests the current run rate that you've been on for the last couple weeks for the first quarter?

Well, as I heard us talking, I recognized that what we were talking about is the existing practices before the Dutch acquisition.

That was going to be my next question.

So, there will be an additional amount with regards to that transaction starting with this coming week, and on a combined basis, you know, we're going to be at clearly a higher revenue run rate. The ETM practice is in its slowest period of the year, so July and August are seasonally slow throughout Europe, and we would expect that revenue during those two months will be negatively impacted by that operating environment. Nevertheless, we expect to pay euro 700,000 to euro 800,000 of revenue per week from that practice, and then as they move further into the year, we would expect recovery to in excess of a million euros per week.

Let me start on just general percentages, first of the fourth quarter on an annual run rate basis for them, or is it too early for you

Say that again, Greg.

Just curious if you were to break down sort of 1Q through 4Q for that business, what would it look like, you know, percentage wise?

We're not prepared to do that on this call.

Ok. Maybe, one quick question about the ownership structure of ETM, you talked about the downsizing, and also the people that came along with, is there any cashing out here? Just talk a little bit about their incentive to stay on.

As far as we know, there's no cashing out. There were three partners of ETM from Ernst & Young. All three of those partners are joining us, and we believe are well incentivized to continue and make this a success. We don't believe that they were cashed out by Ernst & Young where they're not incentivized. That was a very strong issue for us, as to make sure we want that the leadership of ETM was compatible with our leadership and our culture, and that they were well incentivized to continue with us.

Just a last quick one on the size of the downsizing. Can you talk about the number of professionals that might have been downsized?

I suppose I could.

We don't really have accurate numbers here.

I guess I would say this, so, it was relevant to Ernst & Young and at many levels it is not relevant to us, because what the restructuring did is essentially create a G&A stream that is lower than it was during Ernst & Young's ownership, and therefore, creates a higher likelihood of profits in the current economic environment.

Ok. Thanks a lot, guys.

And we'll go now to Randy Mehl with Robert W. Baird.

Yeah, Good afternoon, Don and Steven Congratulations for getting this closed. Wanted to follow up on that last question as it relates to employment agreements or earn-outs. Did I understand that there are none in this case?

There are no earn-outs. We have employment agreements with the three people to leave the office and to leave the business to tie them in to us.

Ok.

But they're nothing out of the ordinary compared to our own employment agreements that Steve and I and Karen had when we left Deloitte.

Ok. That's good to know. And then in terms of stock, Resources stock being given to employees of this company, can you quantify maybe the types of packages or the overall allocation that's going to be made here, if any?

We're still working with their labor lawyers on that. Their labor attorney happened to be on vacation this week so it go not get finalized. We anticipate that they would -- their management group would have stock options similar in ranges to what we have in the United States at this point.

Ok. And just one last question. On the gross margin, when you look at the core business, the non-ETM business, should we expect fiscal 2004 to show an improvement in gross margins assuming conversions stay flat?

I would say that you can expect the -- or we expect the Resources United States business to have hopefully higher gross margins, but the European practice will have lower gross margins. And the reason is that a high percentage of the Dutch practice are independent contractors that are customary in that business environment, and there's a lot less cost attached to independent contractors than there are here in the United States for our associates. So historically, they've had a good operating margin because even though their gross margin was lower, the majority of their people had less costs.

Ok. But excluding the 32 to 35% gross margins attached to the Dutch business, you know, is 40% a realistic level for fiscal 2004?

Randy, I would say that it is our plan or our intent to continue to maintain 40% or higher margins in our traditional businesses. We will be, because of the size of the Dutch transaction, breaking out international operations, so you will be able to get visibility on that, but even in this really challenging economic environment, our core practices stayed above 40% for this year, and that's where we expect them to be in ensuing years.

Ok. Thank you very much.

We'd like to remind everyone, if you do have a question, press the star key followed by the digit 1 on your touchtone telephone.

We'll go now to Brandt Sakakeeny with Deutsche Bank.

Thanks. Good afternoon. Quick question on also the Dutch acquisition. Can you talk about differentials in the client base? Is this fairly large client base like your core businesses had success with, or is it somewhat different in terms of end market and type of business?

Their core client base is very large companies. Some of them are solely Dutch companies like the two utility companies in the Netherlands, the bus company, but they do a lot of work for multinationals that are head quartered in Holland. One of the exciting things we feel we have an opportunity is that up to two years ago, they had very large financial institution clients like in ABN AMRO or ING Bearings who stopped doing work with them because of independence concerns. And one of the interesting observations I have is that the European companies seem to be much more focused on substance of independence versus trying to structure services around the form of independents. So they were getting a lot of pressure from their big multinational clients that were urging other clients to basically stop providing services for them. So we are hopeful that we'll be able to get back into ABN AMRO and ING Bearings where we think the ETM people have good relationships.

Ok. And will they still be able to refer business, will the Ernst & Young folks still be able to refer business to the division just like you all have sort of benefited from prior relationships with some of the Big 4 from which various associates came?

Yes, we believe they will, and they'll want to continue to do that because they don't want the other audit firms to get into their clients. So we benefit from the fact that we're the lesser of all the evils out there from the Big 4 standpoint. They'd much rather have us in there helping our client with Sarbanes than one of their competitors. So we think the same thing will hold true there, and the ETM management feel they have good relationships with a lot of the partners there.

And Brandt, we also have a cooperation agreement with Ernst & Young which essentially requires them to continue to use us for certain amounts of services that ETM has previously given to Ernst & Young, and incense them to continue to refer business. To us.

Part of our due diligence when I was over there is I visited with two of their largest clients who are both Ernst & Young auto clients, and both those clients had said that they were limited in the amount of business that they could do with ETM and now they both felt very relieved that ETM would now be independent of the audit conflicts and they saw us working together, you know, to a much better extent.

OK. Great. Just a few other quick housekeeping items. Steve, I missed your head count numbers. I got the third quarter 03 but I missed fourth quarter 03.

The end of the quarter number was 1,175.

Ok. Then from the prior quarter, that reflected growth in what specific practice areas or geographies?

We haven't disclosed that, Brandt. You know, we disclosed, I guess, in our discussion of revenues that, for instance, RAZ continues to grow very rapidly. We disclosed the dollar amount of revenues from TPC, but for the moment, we have not disclosed separately the revenues from each of our service lines nor the head count from each of our service lines.

For the service lines, though, we did have dollar growth in all three U.S. service lines, all four.

Ok. That's great. One other housekeeping item. I missed the number that you said over a million in billable clients.

Sure. There were 36 clients that we billed in excess of a million dollars this year compared to 24 in the year-ago period.

Ok. Perfect. And I'm sorry, final question is just; I think you did see some slight slippage near the tail end of the quarter. You said earlier from roughly four or five down to 4.2. Anything in particular? Did a big client end maybe prematurely or something like that, or was it just sort of some important issue?

Our experience in this economic climate is growth is not a climbing curve that doesn't go up and down. So we, throughout the quarter, last quarter as well as this quarter, we have weeks where we're up and weeks where we're down. It depends on our abilities to sell, etc. We had a number of Sarbanes projects that were scheduled to start in the end of May, beginning of June, some very large ones where once the SEC came out with their delay, that the clients delayed the projects. And one very significant company. Now we think we're going to do the work eventually, and we've done some test work for the client, but they're just not going through with the whole project yet as they're trying to refine what they're doing.

Ok. Thank you very much.

And our next question comes today from Adam Waldo with Lehman Brothers.

Adam Waldo Good afternoon, Don and Steve. How are you?

Hi, Adam.

Few other questions on the core business and then a series of business on the two acquisitions closed since the end of the quarter. With respect to the core business, can you give us a sense for specifically what the dollar revenue from RAZ was in the quarter; was it in the $6 million range? Is that about right or can you put a finer point on it than doubling relative to last quarter, and what caused that they jumped?

I think, the only thing that we have ever disclosed on RAZ is a run rate early on in its history and then growth from that run rate. I guess without (inaudible) we have decided not to disclose service lines, but I would say that your number that you suggest for RAZ is too high.

It's too high? You had reported in the fiscal second quarter about 3 million of revenue contribution from resource audit solution, so I guess I'm just trying to square that with the comment that revenue doubled in this quarter, but then revenue wasn't $6 million. (inaudible) square that a little bit.

I think, Adam, what Steve had reported was our run rate at the end of the third quarter was $3 million.

Oh, I see. Ok, Don.

Ok?

Yeah.

It is not that that was the revenue. So our run rate, and I think what Steve also said, you know, is our run rate continues to grow. The reasons it's growing is because this was a fledgeling practice that started out with no people. One person led it. We have hired few people, we started marketing; we started getting to our clients. The issues have grown with Sarbanes legislation, so we expect to continue to provide client fee services, and we expect that it will continue to grow at least in the foreseeable future as people address Sarbanes, as well as the really heightened concern of audit committees.

Ok. What was the (inaudible) bill rate inflation in the quarter? You usually give that, but you did not give it this quarter.

Bill rates were up 7%.

Ok. Terrific. So that's a nice improvement. What's driving that sequentially?

Well, as Don mentioned, we had improvement in all of our service lines, and actually this was the first quarter that on a blended basis, we were over $90 an hour in bill rate. The bill rate for he Dutch practice that we acquired is higher than our average, so it should help our bill rates over time, so, you know, (inaudible) I could point to anything specific because it's an across the board improvement.

Ok. Great.

Adam, if I were to characterize it, we're getting higher level projects, and because we're getting higher level projects, we're putting more experience, i.e., more expensive people on it. We had one project where during the quarter; we had three ex-Big 5 partners heading up different teams for us on that project. So the higher level of the project, probably the more our bill rates go up, but the more our costs go up.

Did you have 55 officers at the end of the quarter and are you running 58 now, or did you open a number towards the end of the quarter given the revenue upside?

I do not think we opened any during the fourth quarter.

Ok. And conversion fees as a percent of revenue?

Still about 1%. Still quite low, and it's kind of bumping along at that level.

Ok. Turning to the acquisitions, can you give us a little bit more color on the revenue trends at ETM? I think one of you in his prepared remarks, I think it was Don, implied that revenues were about $57 million for the 12 months ended June on a U.S. dollar basis. And Steve, if I heard you right, I think you said it was $71 million for the 12 months ended June?

June of last year.

Ok. So $71 million in the 12 months ended June 2002?

Yes.

Ok. So that represented a drop of about 21% year over year. Do you have a sense for what proportion of that 20% revenue decline in the latest 12 months was attributable to these conflict issues keeping you away from work versus how much was owing to the general economic environment in the Netherlands?

It's not as simple as you're presenting it, but I'll try to answer it.

Ok.

They lost a lot , they lost a number of what I would call sustainable, repeatable clients. These are clients that will use services in a recession, such as the Fortune 100 type clients that we had. They had a number of those substantial clients that they had to stop doing work for as well as the scope of their work was cut way back. We didn't even attempt to quantify it. The economic environment in the Netherlands also hurt them, but they're also prohibited from offsetting that economic environment by selling more services to these large clients that they had going into the year. So the way we were able to recover from the recession is to focus on our large clients and their issues in the recession to help them through those things, and they were really handicapped by that. So we didn't even attempt to quantify it other than we know the two factors that hurt them and we believe one of the factors, we believe will be overcome because they won't have the independents or the scope issues.

Adam Waldo Ok. And finally, the margins that you gave in terms of historic EBITDA margins particularly, Steve, or I should say the 7 to 10% historic EBIT margin and 30 to 35% historic gross margin. Are those on a U.S. or Dutch GAAP basis, and what kind of trends would they have shown in those margin structures on an LTM basis for your latest fiscal year or for the 12 months ended June?

The numbers or the percentages that I gave you are on a U.S. GAAP basis.

Ok.

On a Dutch GAAP basis, the gross margin is substantially higher because a portion - the portion of their work force that is salaried gets recorded below the gross margin line. That would not be how we would record it. From an operating margin standpoint, we don't expect significant differences between U.S. and Dutch GAAP.

We have not, just to sort of clarify, we have not had Price Waterhouse, our auditors in the U.S., look -- the U.S. firm look at their GAAP. So we're relying on how they're presented to us, so we believe that they're conservative, and we believe that it's close to GAAP.

Ok. And then just quickly, Steve, any sequential change in your allowance for doubtful accounts reserve in the quarter?

No.

Ok. Thanks, guys.

And we'll go now to Thatcher Thompson with CIBC World Markets.

Good afternoon, Steve and Don.

Hi, Thatcher.

Just a few more questions to follow up with Adam on ETM. You're going to have it in the results for 10-1/2 months, is that right?

Just about 11 months. We're closing as of July 1st, really.

Oh, closing as of July 1st?

Yeah. The close was today. It's effective two weeks ago.

Ok. And you mentioned for this quarter will run at 7- to 800 euros a week moving roughly to a million as you progress throughout the year. If I assume an average of somewhere around 900 euros a week, that roughly is a little over -- about a 1,050,000 U.S., so you've got a run rate of, you know, roughly 55 million of contribution?

I think that's a reasonable guess at this point. I wouldn't say that that's -- you know, we're not going to describe exactly what we think the company is going to do at this point just because it's got a year do it and we'll give additional information as the quarters move forward, but I think in terms of kind of taking a reasonable guess, that's in the ballpark.

Ok. And your purchase price of 29.4 million was six times prospective EBITDA, anticipated EBITDA over a 12-month time period?

Yes. Less than six.

So roughly 4.9 million of EBITDA expected on roughly, you know, back the envelope 55 million in revenue?

I'm not going to confirm those numbers on this conference call. I think, you know, we've tried to give enough information for you guys to make reasonable estimates of what the amounts will be, but we're not going to confirm those numbers on this call.

Ok. That will do it. I'll follow up with you later.

Ok.

Thanks.

And there are no further questions in our queue at this time, but we'd like to offer everyone one last opportunity. If you would like to ask a question, simply press the star key followed by the digit 1 on your touchtone phone. Start one and ask a question. We will pause a moment to see if there are any additional questions at this time. There seem to be no more questions at this time. I'll turn the conference back to our speakers for any closing remarks.

Thank you. And this was a quarter for us of strategic importance for our future. We think we've made good progress in our recession, and we've carried out some strategic objectives, and we look forward to the future. So, thank you again for your time and your continued interest in Resources Connection.

And it does conclude our conference call for today. We appreciate your participation. You may disconnect at this time.