CRA International, Inc. Q4 2008 (Qtr End 11/29/08) Earnings Call Transcript

| About: CRA International,Inc. (CRAI)

CRA International, Inc. (NASDAQ:CRAI)

Q4 2008 Earnings Call

January 15, 2009 9:00 am ET


Jim Burrows – President & CEO

Paul Maleh – COO

Wayne Mackie – EVP & CFO


James Janesky - Stifel Nicolaus

Andrew Fones - UBS

Timothy McHugh - William Blair

Unspecified Analyst – Deutsche Bank


Good day and welcome everyone to CRA International's fourth quarter and year-end 2008 conference call. (Operator Instructions)

With us today are CRA's President and Chief Executive Officer, Jim Burrows, Chief Operating Officer, Paul Maleh, and Chief Financial Officer, Wayne Mackey. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Mackey. Please go ahead, sir.

Wayne Mackey

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 expressions are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These statements are based upon management's current expectations and are subject to a number of factors and uncertainties. Information contained in these forward-looking statements is inherently uncertain, and actual performance and results may differ materially due to many important factors.

Such factors that could cause actual results to differ materially from any forward-looking 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. Fifty-three week years happen about every six years.

Jim Burrows

Thanks 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 President and Chief Operating Officer and tasked with creating greater efficiency within our organization and delivering more innovation to our clients.

Paul will be speaking to you about his priorities later on 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 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 effected our results for the quarter including various restructuring initiatives, purchase of convertible bonds, and the consolidation of the results of our NeuCo subsidiary for which CRA became the majority owner again in the fourth quarter.

As outlined in today’s news release total revenue for the fourth quarter of 2008, 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 the result of the divestments during 2008 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 pass 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 2007.

Our business in the fourth quarter was effected by the global economic slowdown, the clients for some of our larger litigation cases requested us to slowdown the pace of [inaudible] some of our business consulting clients delay the contracting and new consulting projects.

The silver lining is that the vast majority of the litigation cases having been settled and most of the consulting projects have just been delayed. So we anticipate that there will be a catch up in the future and 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 remained below historical levels. In Q4 we determined that our earlier cost cutting measures in Q2 were insufficient and we needed to take more aggressive action.

In the face of slowing economy we made a decision to sharpen our focus on our core businesses and shed additional under performing practices. In Q4 we reduced our consultant headcount by more then 80 heads, exited several smaller practices, and closed select offices and reduced the size of some of the others.

None of the actions we took in Q4 and earlier in the year effected our revenue generating capacity in 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 headcount we ended the quarter with 610 consultants compared with 692 at the end of Q3 and 711 at the end of 2007. On a percentage basis we have reduced our consultant base by a total of 21% during fiscal 2008.

Our current breakdown is 192 junior employee consults, and 418 senior employee consultants. On average net revenue realization rate for billed hour in 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 per consultant for fiscal 2008 was $534,000 compared to $545,000 for fiscal 2007 reflecting the 4% four-point decrease in utilization to 71%. We have implemented rate increases for 2009 that are expected to increase the average hourly net revenue rate realization rate by over 5% for the year although the effective increase in Q1 is likely to somewhat less then 5%.

Turning to our performance in different areas of the business on a GAAP basis litigation and applied economics revenues declined a little more then 5% for the quarter due in part to the divestiture of the under performing competition practice in Australia in Q2 and the decline in the dollar exchange rate of the British pound.

For fiscal year 2008 revenue was essentially flat without adjustment for the divested businesses and the exchange rate change and was up moderately on an apples-to-apples basis. Demand during the quarter continued to be relatively strong for both mergers and acquisition work and anti trust litigation.

Examples of our competition work in the quarter included competition analysis and numerous mergers such as the [Aon Venfield] Insurance Brokerages, CC Information Services, Mitchell International Automobile Software, Cooperator Group, Summerfield, UK Grocery Stores, Lloyd’s TSB, HBOSUK [Bags], and [Safee Imbrial] UK Graph Paper mergers.

In addition CRA supporting Intel in an anti trust 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 anti trust analysis and discovers $2.75 billion settlement with Visa and MasterCard, and CRA Advise Olympic Airlines in attending regulatory approval for privatizing its business, and advised DelMonte in its case with the European Commission related to information sharing practices with respect to the supply of bananas.

Of particular note CRA held its sixth annual conference on economic developments in European competition policy in Brussels on December 3. 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 [chip] patent infringement suit against Sony Corp., testimony in a software copyright infringement trial brought by the [Mathworks] against [Comsolo] Sweden, and testimony in arbitration brought by [Kiagen] against [Genprobe and Hoffman and LaRoche] for the breach of a license for detecting human [inaudible] virus, the precursor to ovarian cancer.

After posting excellent growth in Q3 [transfer] pricing revenue 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 planning projects as well as in supporting several active litigation and government negotiations such as Advance Pricing Agreements.

For the fourth consecutive quarter revenues from our labor and employment litigation practice continued to grow rapidly. Revenues in this area more then doubled in the past 12 months. We’ve 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 effected on a year-to-year basis by the conclusion or reduction in scale of some major projects that have not yet been replaced by projects of comparable scale.

However we are still actively engaged on a number of major securities litigation projects assisting clients in damage assessments and state and merger valuations and breach of contract analysis. For example during the quarter we worked on a project for value and damages related to a product recall on a consumer product.

CRA is also actively involved with significant clients or potential clients that face issues related to the global financial and economic 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 named cases that are expected to arise from this financial crisis.

Work in a number of these cases is at an early stage. We anticipate many may grow over time to a larger scale. Our insurance economics group continues to work on a variety of class actions related to annuity valuations and sales practices, valuation 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 picked 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 a 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 of the foreign exchange effect I mentioned earlier. For the year revenues declined by about 5%.

Life sciences revenues grew more then 50% from Q4 of last year. We benefited from our involvement in four ongoing new 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 [inaudible].

Our energy and environment practice declined by about 25% for the quarter and about 5% for the year. Revenues in this area were significantly effected by a postponement of revenues from some major client in the Middle East in 2009. CRA continues to participate in a broad mix of engagements in the fourth quarter including completion of a report on the economic and financial impacts, in Minnesota of a regional cap on CO2 emissions, completion of a report that detailed effective practices and integration of renewable energy in the US transmission system, excellent work on the acquisition of NRG Energy, for the Texas Public Utility Commission work on a cost benefit analysis of the implementation of a [nodal] wholesale market for electricity, a consortium with electric utilities completion of a study on the economic benefits of constructing 1200 miles of a high voltage transmission line in Kansas, for a mix of private equity firms and energy 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 [Fontara] Cooperative Group Limited, the design and execution of successful auctions.

Auctions for these companies are expected to continue through the end of FY09. For the United [inaudible] work on the reorganization of the country’s water and electricity sections. Global industrial consulting revenues in Q4 declined by about 20% from the year earlier period. North Americas revenues declined as a result of significant downturns in 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’ve 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’s Q4 international 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 total revenue in fiscal 2008 compared to 27% in fiscal 2007.

These declines are partly result of 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’ll now turn the call over to Wayne for his financial review.

Wayne Mackie

Thanks Jim, briefly recapping Q4 results, GAAP revenue declined 13% to $85.6 million compared to $98.7 million for fourth quarter of fiscal 2007. As Jim mentioned besides of the difficult economic environment there are a few factors that impacted that 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, on a percentage basis reimbursables dropped to 12.2% of revenue compared to 13.4% of revenue in Q4 of 2007.

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 was 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 [of] CRA. Its operations have been and are expected to remain immaterial to CRA’s financial position and results of operations. 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 percent is due largely to the 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 and 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 in 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 non-employee 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 2007.

Although we were unable to reduce our costs enough to maintain a 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 in SG&A areas. The cost savings overall reflects staff reductions, operating efficiencies from the restructuring efforts, and other control initiatives.

Total interest and other income was $1 million for the fourth quarter of 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 pre-tax basis.

This gain was offset by a decrease in interest income. Interest income in Q4 of 2008 was approximately $500,000 compared to more then $1 million in the year ago period. Reflecting the significantly lower interest rate environment as well as buyback of $11.8 million of common stock earlier in the year, in addition to the repurchase of convertible 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 pre-tax 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 pre-tax 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 [inaudible] losses overseas that were either benefited at a tax rate lower then the statutory US rate or providing 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 advance 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 the same period of 2007. GAAP net income in the fourth quarter of fiscal 2008 included the previously mentioned pre-tax restructuring expenses of $4.9 million associated with a series of initiatives designed to reduce the company’s operating cost and improve utilization, a $207,000 foreign currency loss related to liquidation of our New Zealand based operations, and a pre-tax gain of $1 million and related tax effect of $400,000 related to the company’s repurchase of $10.2 million of its convertible bonds at a discount, and a loss of $310,000 related to NeuCo.

GAAP net income for the fourth quarter of 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 2007 non-GAAP net income of $8 million or $0.69 per diluted share.

We calculated Q4 2008 GAAP and non-GAAP EPS using 10.7 million and 11.6 million shares in Q4 2007. The reduction in diluted shares outstanding is the direct result of our share repurchase plan as well as a reduction [inaudible] which decreased the number of common stock equivalents.

Turning to the balance sheet billed and unbilled receivables were 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 DSO’s was at 98 days. This consists of 36 days of unbilled and 62 days of billed, an improvement over the longer days we 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 possible 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 course of action until 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 2007 and $11.1 million for fiscal 2007. Depreciation and amortization expense was approximately $2.2 million in 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 approximately $15 million in revenue in fiscal 2008 and accounted for approximately $30 million in revenue in fiscal 2007.

That concludes the financial review.

Jim Burrows

Thanks Wayne, in terms of our outlook I’d 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 under performing 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 [inaudible] 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 the 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 headcount 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 or to increase revenue-generating capability. With normal turnover and delayed impacts of the actions we took in Q4, Q1 headcount is likely to decline by 1% to 3%. We are continuing to recruit with the expectation that headcount 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 headcount growth later in the year based on our utilization trends and revenue opportunities. We continue to target an improvement over time in utilization, our long-term target in the high 70’s, but significant strides in this direction will be difficult in the short-run because of the mixed economic climate.

Operationally we have a number of initiatives under way to control expenses and maximize efficiencies. Before we open the call up for questions, I wanted 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, and Executive Vice President at 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 Maleh

Thank you Jim and 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 that we stay close to our clients, that we listen to them, and that we understand the pressures they are facing. We must then take this information and develop valued added service offerings that will meet our clients’ evolving needs. Enhancing client relationships will be a priority for me.

I intend to launch a formal client satisfaction and client relationship review initiative at CRA. This will ensure that we’re 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 a new marketing campaign which will differentiate us and provide a broader view of the firm’s capabilities.

We will also be reintroducing the Charles River Associates name. For more then 40 years this name has been synonymous with our reputation as a leader in the litigation consulting industry and it is the name which so many continue to use when referring to us.

We are also going to continue the efforts of our cost cutting strategic business processes [inaudible] of 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 consultants which will in turn allow them to have more time to focus on my 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 our internal operations and expenses. With that I will now turn the call back to Jim.

Jim Burrows

Thanks Paul. Thanks everyone for listening this morning. We are now ready to take your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of James Janesky - Stifel Nicolaus

James Janesky - Stifel Nicolaus

When you talk about in the release and 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 at what point do you expect that the pipeline could start to open up.

Jim Burrows

It probably will extend into Q1. We do see some, we think that work will start ramping during the course of the year, some will start in Q1, some later. But we think that we’ll see a gradual improvement over time.

James Janesky - Stifel Nicolaus

What do you think it will take the pipeline to become or projects to become unfrozen, do you expect a change in the administration to have an effect on that, do you expect that whenever the financial markets stabilize that the pipeline will, I’m just trying to get a sense of what you think it will take.

Jim Burrows

It depends on the areas. Basically what we’re talking about is some of our, its not every project, its some of the bigger engagements where the clients are sensitive to our rate of billing. In the litigation area I don’t think it’s a function of the administration right now and unless the financial situation deteriorates worse, I think we’ll just simply see as those litigations start to get hot we will be billing more.

In the business consulting area we’ve had some fairly large engagements have been held off for various reasons but I think the climate is a factor. We expect to see that loosening up within Q1 and then getting better as the year go along. So we do see, I think that should give you a picture.

James Janesky - Stifel Nicolaus

So I guess the message as we go into 2009 is that it will be a slow start that we could 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?

Jim Burrows

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

James Janesky - Stifel Nicolaus

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’m looking at, do you think that the gross margins can hold around the 37% level?

Jim Burrows

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 to hold to that or do better.


Your next question comes from the line of Andrew Fones - UBS

Andrew Fones - UBS

Finance I think you said was down more then 40% year-over-year and a large part of that was due to the reduction in scale and some projects you’re working on, can you explain the extent that these clients pulling back on ongoing projects due to the economic environment versus projects actually wrapping up.

Paul Maleh

The scaling back really is in this kind of economic environment our ultimate clients are really looking at sort of essential spend. So with the uncertainty of litigation timelines, there’s always an attempt to try to delay these expenditures. So the environment we’re in now has just pushed out projects into the horizon.

With respect to the replacement of some large cases, we’ve had some large litigations that have settled and we have retentions on some newer litigations but we’re not at the revenue ramp rate that existed for the cases that have just ceased.

Andrew Fones - UBS

On the energy group I think you mentioned that there was some large new wins in the third quarter and obviously there was these delayed [inaudible] contracts, you had to bid on again, could you give us an update on the progress there.

Jim Burrows

No we don’t have to bid again, these are just delayed revenues so we’re hopeful going into the year that we’ll see an improvement.

Andrew Fones - UBS

On the expense side, should we expect a full impact of the cost savings in the first quarter, I think you said $11.5 million annualized.

Jim Burrows

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

Andrew Fones - UBS

On the tax rate, the 41.5% is that a good rate to assume going forward.

Wayne Mackie

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 is probably a reasonable one to use in your modeling.


Your next question comes from the line of Timothy McHugh - William Blair

Timothy McHugh - William Blair

The extra week of revenue do you have any sense the, we can get the revenue impact obviously by doing the math, would there be a margin impact that we should be aware of just from the [leverage] of fixed expenses here and did you do any math around that that you could help us with.

Wayne Mackie

We didn’t do any real math around it but it really shouldn’t have changed things much. It was a week of additional revenue if you will, 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.

Timothy McHugh - William Blair

On the cash flow you mentioned you’re 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.

Wayne Mackie

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

Timothy McHugh - William Blair

Could you extrapolate a little bit on what you’re doing from a marketing perspective trying to get ahead of some of the potential demand that we see out there from litigation activity building up and regulatory activity, what type of things are you able to do right now to try and position yourself from a client basing role.

Jim Burrows

We are directly marketing to the people, the clients we see as impacted by these various financial crisis. We put together a team, we’re generating thought pieces, and we’re 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 on a major case because there’s more then one party and not too many can provide these services and we’re one of the leaders.

We anticipate that the major league litigation we’ll be directly involved in as these cases play out. Almost, obviously not all of them, but a very high percentage.


Your next question comes from the line of Unspecified Analyst – Deutsche Bank

Unspecified Analyst – Deutsche Bank

I thought you mentioned that the demand for litigation was weak due to clients holding up projects, but you also cited a strong backlog for forensic accounting, I was wondering if the demand are somewhat tied to each other.

Paul Maleh

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


Your next question is a follow-up from the line of James Janesky - Stifel Nicolaus

James Janesky - Stifel Nicolaus

What was the combination of depreciation and amortization and stock related compensation.

Wayne Mackie

Let me get that information for you.

James Janesky - Stifel Nicolaus

When you talk about being retained 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 starting up in a meaningful way.

Jim Burrows

The typical situation is a major league firm usually is a big defendant, the types we work for, the big banks, the accounting firms, they retain us to work on the case that’s usually going to be on damage related issues but often the conversation goes until we get a better sense of how the case is progressing and get through the initial rounds of legal filings, why don’t you just get your feet wet but let’s not start any major projects.

Its not tied to any specific milestone. When clients are less sensitive to the costs they may just hire us and say get to work. But we’re getting more of the, we want to hire you but let’s put off the major amount of work until we have a better sense of where the case is going.

Paul Maleh

And particularly with these large-scale litigations the legal team and the ultimate clients really want to put together their complete project team which includes the economic consultants, their being the premier provider is often times called early on in these cases. So we’ll get added on to the team just so they can have that composed but not necessarily start work until very later on.

So we’re retained but its much more of a wait and see as to when work begins.

James Janesky - Stifel Nicolaus

How has the significant decline in the price of oil effect it or do you think will effect your energy practice.

Jim Burrows

We don’t think there will be a major impact. There’s still a huge amount of work being contracted in the Middle East. If anything a lot of work we do will in fact be stimulated because much of what we’re doing is at least when we’re working with public sector clients there, helping them figure out how to transform their economies to be less dependent on oil and that’s even more of a concern now. So at $140 oil there are things that didn’t matter now things really do matter.

So I don’t, we don’t see any impact at 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 don’t have to do a lot of analysis to figure out how to make money, $40 of oil is quite different. I don’t think at that level of oil prices will have any major downward effect on our demand.

Wayne Mackie

Here are the numbers, depreciation and amortization for Q4 of 2008 was $2.2 and the stock compensation was $1.3 for Q4 of 2008. For depreciation and amortization its $2.4 million for Q4 of 2007 and $1.5 million for Q4 of 2007 on the stock compensation.


Your next question is a follow-up from the line of Andrew Fones - UBS

Andrew Fones - UBS

You’ve talked in the past about how vocal Obama has been regarding in his view has been the lack of regulation on the anti trust side. Now he’s got his new team in place, could you talk about in your opinion what the views are of some of the new people he’s put on this regulatory team and to what extent you think those people are going to be aggressive in pursuing regulatory and investigative actions.

Jim Burrows

I don’t think the appointments have been made down at the level that will directly effect us but its clear his administration based on what’s already been said is going to be 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 justice department will be bringing more cases.

I think it can only be good for us.

Andrew Fones - UBS

If we could get some guidance on CapEx for this year please.

Wayne Mackie

We haven’t given the information out. I don’t have it right here with me. I think I mentioned during the call what the numbers were for 2008. I don’t see a substantial change in 2009 relative to what it was in 2008 but I don’t have the numbers right here.


There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Jim Burrows

Thanks everyone. We look forward to speaking with you on our first quarter fiscal 2009 conference call. This concludes today’s call.

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