Hill International Q1 2010 Earnings Call Transcript

| About: Hill International, (HIL)

Hill International (NYSE:HIL)

Q1 2010 Earnings Call

May 6, 2010 11:00 am ET

Executives

David Richter - President & Chief Operating Officer

John Fanelli - Senior Vice President & Chief Financial Officer

Devin Sullivan - The Equity Group

Analysts

Richard Paget - Morgan Joseph

Arnold Ursaner - CJS Securities

David Gold - Sidoti

Bill Sutherland - Boenning & Scattergood

Joseph Foresi - Janney Montgomery

Sarkis Sherbetchyan - B. Riley & Co.

Tim McHugh - William Blair

Richard Paget - Morgan Joseph

Operator

Good day everyone, and welcome to the Hill International, first quarter earnings conference call. At this time I would like to inform you that this conference call is being recorded, and that all participants are currently in a listen-only mode.

I would now like to turn the conference over to Mr. Devin Sullivan of The Equity Group; please go ahead sir.

Devin Sullivan

Thank you Tina, and thank you everyone for joining us this morning. Our speakers on today's call will be David Richter, President and Chief Operating Officer of Hill International and John Fanelli, Senior Vice President and Chief Financial Officer.

Before we get started, I’d like to remind everyone that statements made during today's call maybe considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and it’s Hill's intent that any such statements be protected by the Safe Harbor created thereby.

Except for historical information disclosed during this call, the matters set forth herein, including but not limited to any projections of earnings or other financial items, any statements concerning plans, strategies, and objectives, future operations and any statements regarding future economic conditions or performance are forward-looking statements.

These forward-looking statements are based on Hill’s current expectations, estimates, and assumptions, and are subject to certain risks and uncertainties. Although, Hill believes that the expectations, estimates, and assumptions reflected in forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any forward-looking statements.

Important factors that could cause actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in forward-looking statements include modification and determination of client contracts, control and operational issues pertaining to Hill’s business activities conducted on its own behalf or pursuant to joint ventures with other parties, difficulties incurred in implementing its acquisition strategy, the need to retain key technical and management personnel, and unexpected adjustments and cancellations related to backlog.

Additional factors that could cause actual results to differ materially from forward-looking statements are set forth in the reports filed with the Securities & Exchange Commission. Hill does not intend and undertakes no obligation to update any forward-looking statements.

I’d now like to turn the call over to David Richter, President and Chief Operating Officer of Hill International. Please go ahead David.

David Richter

Thank you very much Devin. Thank you everyone else for joining us this morning for our quarterly earnings conference call. Yesterday we announced our first quarter 2010 financial results. To put it simply, we had a weak quarter to say at the least. As we run through the numbers in detail, we also focus on the issues that impacted us, positively and negatively.

For the first quarter of 2010, Hill’s total revenues grew to $104.5 million, a 0.5% increase from the first quarter of last year. Consulting fee revenue for the first quarter declined slightly to $91.9 million, a decrease of 0.2% from the first quarter of 2009. This decrease in Hill’s consulting fee revenue for the quarter was due to a 3.5% organic decline, offset by 3.3% growth in the acquisitions late last year of Boyken International and TRS Consultants.

Primary drivers have changed in our consulting fee revenue year-over-year, including the increases of $4.9 million in our North African projects business, $3 million from our acquisitions of Boyken and TRS, $1.5 million from our UK Claims business, $1.2 million of an increase in Middle East claims, and $1 million in our Southwest projects business.

Those were all set by declines of $6.8 million in our project management work in Iraq, $2 million from our Dubai projects business, $1.9 million in our European projects group, and $1 million of a decline in Asia Pacific claims.

Operating profits for the first quarter of 2010 dropped to $2.7 million, a 37.8% decrease from the first quarter of 2009. Our operating margin as a percentage of consulting fee revenue dropped to just 2.9% from 4.7% in the quarter a year ago. This was driven by a slight decrease in our gross margin, 42.6% to 42.2%, combined with a slight increase in our SG&A percentage from 39.1% to 40.2%.

While our corporate overhead continues to drop as a percentage of consulting fee revenue from 7.7 a year ago to 7.2% this quarter, the SG&A of our operating groups increased from 31.4% to 33.0%. This was primarily the result of the acquisitions late last year of Boyken and TRS, which had a high unapplied labor and indirect labor in the first quarter, as well as having caused higher average expense for Hill in the first quarter. We were also impacted by the loss of a significant amount of high margin work in Iraq as I mentioned earlier.

We received an income tax benefit of nearly $500,000 in the first quarter. As a result, our net earnings in the first quarter were $2.5 million, with $0.06 per diluted share, based on $40.9 million diluted shares outstanding, down 44.2% from $4.4 million, to $0.11 per diluted share based on $41.1 billion diluted shares for the first quarter of 2009.

Included in the diluted share count for the first quarter or one million shares issued in April this year, in connection with our Management Team’s earn out which was tied to the going public merger between Hill and Arpeggio back in 2006. The earn out is now complete, and there will be no more earn out shares issued and resulting in dilution in the future.

We also look at our financial performance sequentially, meaning versus the immediately prior quarter. From the fourth quarter of ’09 to the first quarter of 2010, Hill’s total revenues were down 5.3%, and our consulting fees were down 1.8%. The first quarter was trending upward after a difficult early 2009, so we obviously are disappointed to see a negative trend to begin 2010.

Our gross profit was only down 5.5% sequentially, but because of higher labor costs, as we started the New Year with raises causing significant overhead increases combined with lower utilization, we added costs of our two acquisitions. Operating profit was down 64.0%, and our net earnings were down 46.2% in the first quarter versus the fourth quarter, despite only a slight drop in consultant fees.

Looking at the performance of our two operating segments separately, we continue to see a very positive trend in our construction claims business. Total revenue in the first quarter, the Hill’s construction claims group increased to $25.4 million, an increase of 9.6% over the first quarter of ’09.

Consulting fee revenue on the first quarter for the claims group increased $24.6 million, an increase of 9.6% over the year-over-year quarter, an increase that was all organic. Operating profit for the claims group in the first quarter was $4.2 million, or 17.2% of CFR, a jump of 81.6% in the first quarter of 2009.

The first quarter was far more challenging for our project management business. The CM group had total revenues in the first quarter of $79.1 million, a decrease of 2.1% to begin with the first quarter of ’09.

Consultant fees for the projects group in the first quarter were also down to $67.3 million, a decrease of 3.4% from the prior year’s quarter. That percentage of change was comprised of an organic decrease of 7.8%, offset by a 4.4% increase from acquisitions. Operating profit for projects group in the first quarter was $5.1 million or 7.6% of CFR, a drop of 43.9% compared to the first quarter of 2009.

During the first quarter we had negative cash flow from operations of $80.9 million and negative net cash flow of $800,000. The primary driver of the negative cash flow was an increase in our accounts receivable. We ended the first quarter with a strong balance sheet, total assets of $289 million, cash and cash equivalents of $30.1 million, and total debt of $35.1 million. Our shareholder’s equity under the quarter was $159.1 million.

Turning to our backlog, our backlog took a significant drop, about total in 12 months during the quarter. Hill’s total backlog on March 31, decreased to $550 million, from $620 million at the end of last year. 12-month backlog at the end of the first quarter was $249 million, down from $282 million at December 31.

These increases were the result of lower net bookings in the first quarter, primarily due to several major project cancellations in the Middle East. We had about seven cancellations totaling about $35 million in total backlog, and new sales of just $55 million during the quarter; obviously on the sale side and with the cancellations, a disappointing quarter to say at the least.

In response to how we performed in the first quarter, we took some significant cost cutting actions at the end of the first quarter and the beginning of the second quarter. We recently made about $7 million in annual overhead costs, which included the termination of over 50 people within the company. We incurred about $0.5 million severance cost in connection with that, half of which we incurred in the first quarter, and half of which we incurred in April.

Obviously we began 2010 with very positive expectations, but the worst of the economy was behind us. Given our performance between the project management group in the first quarter, we still think they may have significant headwinds, but we are working hard to sell as much work as we can, cut as much of our cost as we can, and do significantly better in the second quarter and the rest of the year.

So with that, John Fanelli, our CFO and I are happy to take any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Richard Paget - Morgan Joseph.

Richard Paget - Morgan Joseph

I wonder if you can give some more color on the project cancellations. Just listening at some other conference calls, the E&C companies, and them saying they are starting to see pick ups, their oil has been pretty high for a long time.

I’m wondering if there’s a particular area or type of project, whether these are projects that were maybe bid a long time ago, and customers are saying, “Well, prices are cheaper, maybe we’ll try and rebid them at lower prices” I wonder if there is any kind of trend that you can give us a sense of what’s going on, and know what’s the outlook going forward; it’s just finally over here.

David Richter

Yes, as far as we know, all the cancellations resulted not because Hill was terminated, but because the project was terminated. They were primarily in the Middle East and primarily they were commercial and presidential and mixed use projects. I think we are just impacted by the economy and the ability of our clients to raised funds and borrowed debt to fund our projects.

We thought the worst of that in 2009 and was behind us, but we obviously had some more that was going on, and the clients decided to officially pull the plug. Nonetheless as far as I know, having significant revenue being generated from them, they were long term in our backlogs, and as far as further cancellations, we just don’t know.

Richard Paget - Morgan Joseph

So you’re saying that some of these are commercial projects that were brought up maybe a year ago, and had been holding out and hadn’t been cancelled like some other ones earlier, is that fair you say?

David Richter

That is for a say.

Richard Paget - Morgan Joseph

Then could you give us a sense of how many of these kind of commercial projects that need to raise debt to go forward remain in backlogs?

David Richter

No I couldn’t tell you.

Richard Paget - Morgan Joseph

Is it a big number or is it small? I mean just a ballpark.

David Richter

I couldn’t even put a number to it. Obviously we’re in every stage of projects throughout the world, from wrapping some up to beginning new ones, and the breakdown of where the projects stand within our backlog we don’t calculate that.

Richard Paget - Morgan Joseph

Okay, I guess on a brighter note, the possibility and claims was pretty strong. What do you think the sustainability of that is? Is that their business indeed, or was it some kind of catch up work, or it’s just that the trend is getting better and we can expect kind of a mid-teen rate going forward?

David Richter

Well we’ve seen our three quarter trend in positive results at our clients group, the third and fourth quarter of last year and the first quarter of this year. We certainly would like to see to continue on the down sizing.

The claims business, it can be very lumping in its results and its sales, and while we have high expectations for this year, we still can’t give any assurance that the second quarter will be better or worse or the same, but obviously we are very pleased with the margins, with the growth and with the performance the group is offering for this first quarter.

Operator

Your next question comes from Arnold Ursaner - CJS Securities.

Arnold Ursaner - CJS Securities

I want to try to follow up on the last question, and get a little more clarity. In your March 11 conference call, you were asked by an analyst, you have some project cancellations, has that activity died down or do you feel better about your backlog, and your answer on March 11 was, we’re not aware of any major cancellations that we had in the fourth quarter and bold and underlined in my notes “We are as profitable now as we have been with our backlog. We don’t anticipate anything being cancelled, but obviously some projects here and they are sometimes good.”

Since that was 18 days before the end of the quarter, can you comment when these seven projects were cancelled, and give us a lot better clarity on when they occurred and when you were aware of it?

David Richter

Yes, the bulk of the projects were cancelled in March. As of the February backlog which I don’t think we had as of that conference call they were in the backlog, by the March 31 backlog they were not.

Arnold Ursaner - CJS Securities

So what you are saying is that you were not aware of this 18 days before the end of the quarter when the seven projects cancelled that late in the quarter?

David Richter

Yes.

Arnold Ursaner - CJS Securities

Okay, and as a follow up to that, your business model is based on you don’t have project risks; that’s is one of the more positive things about your project management business, and yet you do basically time and materials bill. What was the cause of the 300 basis points margin in the quarter, given that you don’t have fixed costs?

David Richter

You’re talking about the operating margin?

Arnold Ursaner - CJS Securities

Yes.

David Richter

Yes it was a combination of some increased SG&A costs.

Arnold Ursaner - CJS Securities

Actually I was talking about the gross margin; you were 36-2, which is well below where you’ve been for that segment?

David Richter

Let me just take a look. Yes it was 290 basis points got from the total again.

Arnold Ursaner - CJS Securities

Since you guys are basically time and cost billed, why would you have that big a hit, were you under pricing pressure in the quarter?

David Richter

No we don’t believe so, not in a material way. What we had Arnie was a significant drop and very high margin working, like almost $7 million worth of consulting fee revenue, which was extremely high margin work for us. So the remaining work was a little lower margin. If draw on work, about $3 million worth from the acquisitions of Boyken and TRS which had lower gross margins than Hill usually has, and that difference was the primary driver there. The driver at the bottom line was increased unemployed labor, both from Hill, as well as from the two acquisitions, offset a little bit by some gains from the other areas of the company.

Arnold Ursaner - CJS Securities

Okay, when was the $6.8 million work in Iraq cancel?

David Richter

It wasn’t work canceled. We had a high level of work in the first quarter of last year relative to the first quarter of this year. Our contract in Iraq is going to be over by the end of the third quarter of 2010. It’s been trending lower for the last five, six to nine months and we expect it to wind down over the next six months, and then we’ll be completed on that project.

Arnold Ursaner - CJS Securities

Okay, and again, on the acquisitions you made, did they lose money in the quarter, a negative impact on your gross margin from the two acquisitions?

David Richter

Between the two of them it was neutral. One lost a slight amount of money and one made a slight amount of money.

Arnold Ursaner - CJS Securities

Okay, final question from me; regarding your SG&A, again relative to your reduced expectations or lowered expectations or more tightly controlled expectations delivered March 11, you missed this quarter by quite a bit, and again I’m pressed to not assume you at least had some incline to some of these things.

What is your current view of SG&A for the balance of this year, and imbedded in that, given the, as you pointed out disappointing performance in Q1, was there a reversal or a reduction in management bonus accruals in Q1?

David Richter

We give a target I believe in the last call of 35 to 37% from our target of 36% to 38% last year. Obviously for this quarter I think it was 41.1 John. So obviously well outside the margin. We expect it to trend downwards significantly from there, although Johnny is still comfortable giving that 35% to 37% target for the year?

John Fanelli

I would say it’s trending a little higher. What happened in the first quarter was the integration of the two acquisitions of TRS and Boyken. The integration of those two in terms of overhead reduction came in the latter part of the quarter, and we completed those in the beginning of the second quarter. So we should see some leverage on our cost. So I would say it would be close to what we have projected, but maybe slightly higher.

David Richter

Yes, we had very little bill from the overhead until they were integrated. That took about 90 days from both companies, and yet we were settled to be the higher amortization from both the companies, which impacted us quite a bit. I can’t imagine that we are going to be near 41% going forward.

Operator

Your next question comes from David Gold - Sidoti.

David Gold - Sidoti

I wanted to get a little more color if you can on the change in the backlogs sequentially. Can you give us a sense for -- obviously you have some cancellations, but sort of order of magnitude there, and then late over sales. Basically was it both cancellation in just a really bad sales quarter, or was it more the cancellation or what sort of happened in there?

David Richter

Well it was really a combination of the two David. We furnished $92 million of backlog in the first quarter. We had about $35 million cancelled. Then there was a major part; we constantly have slight increases, slight decreases in our backlogs. Those are being reassessed every month, but we highlighted these seven, because they were significant; and given a change in the backlog, minus $70 million, we sold about $55 million worth of new works for the quarter. That wasn’t a bad quarter.

We had two quarters last year with over $100 million of new sales; the second and third quarter; and we had a combination of really two things on the business revolving front. We had some projects we thought we were going to win that we lost, and we had some projects where we thought we were going to win, and still think we’re going to win that got pushed into the second quarter hopefully and hopefully not the third quarter as well.

We have a lot of big projects. The chase in the pipeline is still pretty solid. We just have to do our job and deliver the new work. We don’t know what that’s going to be in advance, we can guess, until our clients never finds that we won or lost, it’s impossible to know.

David Gold - Sidoti

On that note, is there anything from hear that we’d do differently as to the sales activity?

David Richter

Yes, it’s not a matter of changing or restructuring. It’s just a matter of pretending to push as best as we can. We’re constantly trying to move our business in all of our efforts. We have a team in place in the US; you’ll find that business has been there for a little more than twelve months. I think they are doing an excellent job. As far as their effort, I’d like to see better results, and I think we’ll see better results over the next twelve months.

Internationally, we have had some areas flipping. It’s been a challenging sales environment. There’s a lot of work out there that we think we could close down in 2010, and we are doing everything we can to make that happen. As you know, one of the most important things that we do here is new work; we can’t grow until we do that.

David Gold - Sidoti

Then just one last; as to the overhead, the G&A cuts that you made. Can you give some sense of what you’ve done there to get to the $7 million?

David Richter

Yes it was primarily people, our biggest expense is payroll. So we took out a little over 50 people between February, March and April. That combined with direct salary cost and direct cost and expenses, will save us on an annual basis almost $7 million in overhead cost, with very little impact on revenue.

David Gold - Sidoti

Were they largely on the PM side?

David Richter

They were throughout the company, corporate clients and projects.

Operator

Your next question comes from Bill Sutherland - Boenning & Scattergood.

Bill Sutherland - Boenning & Scattergood

John can you give us a backlog split for the quarter?

John Fanelli

Sure the total backlogs project management is $518 million, claims $32 million, so a total of $550 million.

Bill Sutherland - Boenning & Scattergood

And do you have the 1231, the DFO?

John Fanelli

Yes 1231 project management is $583 million, claims $37 million, with a total of $620 million. The twelve months backlog numbers of March 31 for project management was $210 million, claims $30 million for a total of $240 million and as of December 31, project manager was $249 million, claims $33 million, so a total of $282 million.

Bill Sutherland - Boenning & Scattergood

Most of my questions have been asked already. I’m just still a little fussy on what happened with the -- could be the operating margin level and project management. This is sort of I guess on top of Arnie’s questions. If maybe just going through it again, I didn’t hear everything David, you don’t mind doing that?

David Richter

No, not at all. Probably the biggest impact on us was the decrease in work in Iraq. A decline from the first quarter of ‘09 to the first quarter of 2010 of $6.8 million, and that was extremely high margin work for us. That operation is entirely a field operation essentially with no real overhead, so all of our cost were reimbursable, so we had very high margins on that business.

We had a decrease in work of about $2 million in Dubai. I don’t have to explain why that business is going down. Europe has been challenging for us as well, and we saw a decrease of about $1.9 million, principally in our Polish operation where the economy there has been very hard hit, and our operations is entirely a private sector project management business, and that work has got us vigilant.

In our Asia-Pacific claims operations, despite the fact that claims overall did very well, that business continues to struggle.

Bill Sutherland - Boenning & Scattergood

So yes, I got the revenue change impacts, it was just the margin impact. It really was Iraq kind of disproportionately impacting the operating margins in PM and.

David Richter

It was Iraq, it was the Middle East business, which had a revenue decline, and their margins decreasing. We had some delays in getting new staff up and billable in our North African operation, primarily in Libya, and we added two businesses in December that added really nothing to the buy amount in the first quarter, yet increased both our overhead and our amortization cost, because the acquisition was having a significant difference as well to the bottom line of the projects.

Bill Sutherland - Boenning & Scattergood

So looking ahead as far as how quickly the margins can come back in this unit, I guess the challenging thing is going to be the air pocket created by Iraq?

David Richter

I’m sorry, was that another question?

Bill Sutherland - Boenning & Scattergood

The question Davie, is just looking ahead and trying to understand kind of how quickly you can get that PM’s margins back to an expectable range. It seems like the biggest challenge will be finding business to replace your act that’s got similar margin categorist.

David Richter

Yes, I don’t think there is any question to that, and we are pursuing several projects right now that would replace Iraq with possibility more projects in the Middle East and South Africa and the US, and our job most importantly this year is to make sure we close in those sales.

Bill Sutherland - Boenning & Scattergood

Okay, just last; is there any update on Hill International Real Estate Partners at this point?

David Richter

No, nothing deferent from the last time we talked about it.

Operator

Your next question comes from Joseph Foresi - Janney Montgomery.

Joseph Foresi - Janney Montgomery

Just wanted to get am update on your acquisition plans.

David Richter

The acquisition planes are what they’ve always been, which is the constant look out to acquire good project management clients firms, while the other business is complementary to what we do. We have quite a few firms that we are actively talking to and I don’t want to make any guesses on what’s going to close in the near future, but we are very confident on that front, that we’ll be able to bring in some high quality firms over the balance of the year.

Joseph Foresi - Janney Montgomery

You had mentioned that the target before had been a $100 million in debt; that’s something that is still a target to-date.

David Richter

A $100 million in debt.

Joseph Foresi - Janney Montgomery

Bringing up the debt.

David Richter

We have a $100 million credit facility, that’s $35 million borrowed again at the moment, in fact less than that, because that number includes some overseas debt. So we have a lot of borrowing capacity to fund any acquisitions that we need to do to or our working capital.

I think I may have said it in the past that $100 million is sort of where we would be comfortable based on today’s business. As we get larger, our balance sheet gets stronger, we bring in good companies in the fall that improve our profitability. We like to be more comfortable with a higher amount.

Our credit facility has a $50 million accordion feature which we can increase it if we have the assets to support the higher line, but we are by nature a risk adverse company when it comes to a lot of bank debt, and we don’t want to put the company in too much at risk on that front.

Joseph Foresi - Janney Montgomery

Okay and you mentioned that work in Iraq was going to be over at the end of the third quarter. Was there any update on maybe any additional work in Afghanistan or elsewhere for the joint venture?

David Richter

No not for the joint venture. We have some work in Afghanistan, in partnership with Baker. We are testing another contract there with the same partner, but that work is relatively small and certainly not in the same level of magnitude that Iraq is.

Operator

Your next question comes from Sarkis Sherbetchyan - B. Riley & Co.

Sarkis Sherbetchyan - B. Riley & Co.

A couple of housekeeping question here; can you break our D&A by segment please?

John Fanelli

Well disclosed this in the press release in the table, but I can go over it again with you if you would like. For the project management for the quarter, total SG&A was slightly over $20 million, and for the clams business it was $10.3 million.

Sarkis Sherbetchyan - B. Riley & Co.

Is this depreciation and amortization?

David Richter

He was asking for D&A not SG&A.

John Fanelli

D&A, I’m sorry..

David Richter

Do you have those numbers of growth now?

John Fanelli

I don’t have those but I can get those for you. Why don’t you ask another question and I’ll try to find it.

David Richter

If you’d like you can feel free to e-mail John and he will respond with the actual numbers.

Sarkis Sherbetchyan - B. Riley & Co.

Sounds good. I guess moving on to the other questions. It seems like the decisions for the project cancellations, was this largely due to financing from the customers. Can you give us some more color on that?

David Richter

To my understanding is it’s a combination of financing as well as market conditions where those projects are located.

Sarkis Sherbetchyan - B. Riley & Co.

And you also mentioned a couple of projects in the euros line as well, so there where projects cancellations outside of the Middle East in those slides that you disclosed?

David Richter

I said they were primarily the Middle East, I think six of them were in the Middle East and one was in North Africa

Sarkis Sherbetchyan - B. Riley & Co.

And how are collections holding up, and is there anything that you can do to potentially bring DSOs out?

John Fanelli

Sorry we are doing our best. Our DSOs even with the quarter that we had are sustained at the same it was at the end of fourth quarter. We are targeting each client, we have monthly meetings to address outstanding receivables, and we make concerned efforts to make those collections.

David Richter

of course we are in some parts of the world where collects typically are very slow, like the Middle East and North Africa and we are doing everything we can to bring our [Inaudible] and given the economy now, its certainly slower than it was two years ago, but we are making every reasonable effort we can to peak those DSO’s.

Sarkis Sherbetchyan - B. Riley & Co.

And what do you think about repurchasing shares; they are still hoping on quite a bit.

David Richter

I’m sorry could you ask that one more time.

Sarkis Sherbetchyan - B. Riley & Co.

Would you think about repurchasing shares?

David Richter

We have a share repurchase program that our board put in place in November ’08. It was increased in August of last year to $40 million. Against that I believe we’ve spend about $17 million or so, so we have a lot of dry powder in that regard. We have some limits respecting our bank agreement, but we have a pretty large ability to repurchase shares we think on our value, and given where we last saw the stock price this morning, we think they have a value. That’s something that we may look at over the balance of this year.

John Fanelli

I have those numbers, those amortization and depreciation for you. D&A for the projects booked in the first quarter was $1.379 million, and for claims it was $538 million.

Operator

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

Tim McHugh - William Blair

Just wanted to ask on the weakness in the new sales that you mentioned for Q1. Was that more so in the Middle East or was it spread across the geographies; and I guess you mentioned a few projects that slipped, were those of the Middle East or was that just spread around.

David Richter

No, I think it was spread around pretty well.

Tim McHugh - William Blair

And then the cost savings here, given that this is primary people, a payroll expense that you’ve cut out, should we see those cost savings pretty quickly here in Q2 and Q3 or will it take some time.

David Richter

Yes, I think we’ll see certainly a majority of them in Q2, and all of them by Q3. In addition to that, we are continuing to look at our cost to make sure that given what we are going to be doing the second quarter month by month, we are doing everything we can to keep our overheads cost as low as we can.

Operator

Your next questions comes from Richard Paget - Morgan Joseph

Richard Paget - Morgan Joseph

Just a quick follow-up, haven’t talk much abut the demotic market. Have you guys seen any kind of pick-up in activity outside of commercial?

David Richter

Well don’t really do any commercial in the US. The areas where we are in public sector and transportation, we do see a lot of work out there, and we are working hard to close as much of it. The pipeline, not just for the US public sector, but everywhere with a couple of exceptions is pretty strong and we got some big opportunities. I think the first quarter was not a good sales quarter for the US PM group, but we expect that to change over in the balance of the year.

Richard Paget - Morgan Joseph

Okay, so relative to where we were in March, I guess you have seen the pipeline pick up, is that fair to say?

David Richter

You mean like over the last 30 days.

Richard Paget - Morgan Joseph

Yes.

David Richter

No, I think the pipeline is in the same place it was 30 days ago, we haven’t seen it changing.

Richard Paget - Morgan Joseph

Okay and then just a quick housekeeping, what should we expect for the tax rate going forward.

David Richter

For the full year, between 15% and 18%.

Richard Paget - Morgan Joseph

And then what will be a normalized annual going into 2011.

David Richter

Again it depends on the mix. I would say in that range maybe playing it hard between 18 and 20.

Operator

Your final question comes from Arnold Ursaner - CJS Securities.

Arnold Ursaner - CJS Securities

I want to try and follow up on Richards question if I can. To avoid again more surprises by your company, could you focus a little more about April? You mention some of the sales you had were a week’s slip. I’m assuming, I don’t want to put words in your mount, they would not consummated in April, is that fair to say.

David Richter

Well, it appears actually that we have a lot of projects we were chasing, some we though we are going to win but we didn’t and some we expect to win that weren’t decided in first quarter and haven’t been decided yet. We hope it will be resolved over the next couple of months, and we are confident that a significant amount of those projects we are going to win and bring in some new work.

Arnold Ursaner - CJS Securities

Since it caused a huge short fall in Q1, can you comment on the additional cancellations you had in April that may have affected backlog.

David Richter

They were many.

Arnold Ursaner - CJS Securities

And again, given the anonymous miss in Q1, have you changed your process or reviewed to quality things that are in your backlog to see if they are likely to move forward.

David Richter

No, we haven’t.

Arnold Ursaner - CJS Securities

Is there any reason you haven given thoughts to that?

David Richter

To quality our backlog, well, I do expect to quality our backlog.

Arnold Ursaner - CJS Securities

Well you have an order in backlog, you saying if it’s a customer that is week, now ill you deem it mainly financial or other issues; in other words, in the past you had indefinite quality, indefinite work where you will at some point take it out of backlog. If you have more short-term work, a more careful review of your backlog could perhaps give investors a better feel for what you’re looking at.

David Richter

No, we are constantly going though an evaluation, by constantly I mean every month of the backlog, how much we expect to get from that client, both short term and long term. Certainly with [IDIQ’s] we have to constantly be seeing whether we are getting enough workout of them to keep the full amount of the IDIQ in our backlog, and that happens on a regular basis.

As far as going through and seeing that our clients have enough money to fund their project, whether the market sectors don’t have to support their projects, that’s a kind of qualitative review of our backlog we don’t do.

Arnold Ursaner - CJS Securities

And your margins in client consulting, obviously which was a very nice positive surprise in the quarter, and well above your views of where you though they would normalize. How should we think about the margin going forward, and was there any one-time feel or other items, that cost you one, to be mature above your longer term views for margins.

David Richter

Well obviously the clients bounces around from quarter-to-quarter. We did have one material, so to say wind fall fee. We very rarely do any kind of contingency work, but in the first quarter you will see the contingency from a client that resulted in a positive impact to the bottom line of the clients group of $2 million for the quarter.

Operator

(Operator Instructions) There are no further questions. I will turn the conference back over to management.

David Richter

Thank you everybody. We appreciate your time today. We are as disappointed with our performance in the first quarter, as I know you and our other investors are, and we are going to continue to work very hard to produce better numbers for the balance of the year. Thank you very much. Take care.

Operator

Ladies and gentlemen, this concludes our conference for today. That you all for participating, and have a nice day. All parties may now disconnect.

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