CRA International,Inc.

Good day, everyone, and welcome to Charles River Associates' third quarter 2022 conference call. Please note that today's call is being recorded. The company's earnings release and prepared remarks from CRA's chief financial officer are posted on the investor relations section of CRA's website at crai.com. With us today are CRA's president and chief executive officer, Paul Malley, chief financial officer, Dan Mahoney, and Chief Corporate Development Officer, Chad Holmes. At this time, I'd like to turn the call over to Mr. Mahoney for his opening remarks. Dan, please go ahead.

Thank you, Rob, and good morning, everyone. Please note that the statements made during this conference call, including guidance on future revenue and non-GAAP EBITDA margin, and any other statements concerning the future business, operating results, or financial condition of CRA, including those statements using the terms expect, outlook, or similar terms, are forward-looking statements as defined in Section 21 of the Exchange Act. Information contained in these forward-looking statements is based on management's current expectations and is inherently uncertain. Actual performance and results may differ materially from those expressed or implied in these statements due to many important factors, including the level of demand for our services as a result of changes in general and industry-specific economic conditions. Additional information regarding these factors is included in today's release and in CRA's periodic reports, including our most recently filed annual report on Form 10-K and quarterly reports on Form 10-Q filed at the SEC. CRA undertakes no obligation to update any forward-looking statements after the date of this call. Additionally, we will refer to some non-GAAP financial measures and certain measures presented on a constant currency basis on this call. Everyone is encouraged to refer to today's release and related CFO remarks for reconciliations of these non-GAAP financial measures to their GAAP comparable measures and descriptions of the calculation of EBITDA and measures presented on a constant currency basis. I will now turn it over to Paul for his report.

Paul? Thanks, Dan, and good morning, everyone. Thank you for joining us today. CRA drove continued momentum in the business and demand for its services as quarterly revenue increased to $148.4 million. representing 8.8% year-over-year growth. The strong performance was achieved despite currency headwinds associated with the U.S. dollar that shaved $4.2 million, or 3.1% year-over-year growth, from our reported revenue on a constant currency basis. We expanded third-quarter revenue in our North American operations by more than 10% year-over-year, Revenue from our international operations was flat on a reported basis, but grew by 16% when adjusted for currency headwinds. Our performance was broad-based, with seven of our 11 practices expanding revenue year over year, and five of those practices, antitrust and competition economics, auctions and competitive bidding, energy, finance, and labor and employment, delivering, double-digit revenue growth. We welcomed 105 new consulting colleagues during the quarter while maintaining strong company-wide utilization of 74%. We continue to effectively manage the business, mitigating cost pressures, and converting CRA's top-line performance into strong profitability. For the third quarter, CRA increased non-GAAP EBITDA, net income, and earnings per diluted share year over year by 21.3%, 8.7%, and 13.9% respectively. I will now highlight some of the services we provided during the quarter. Merger activity slowed considerably in the third quarter as worldwide M&A levels declined by 59% compared to year-ago levels. The third quarter of 2022 marked the first quarter to fall below $1 trillion since the second quarter of 2020. Against this challenging backdrop, our antitrust and competition economics practice continued its strong performance. Despite the decline in worldwide M&A activity, our antitrust and competition economics practice saw the same level of lead flow of merger-related opportunities in the third quarter of 2022 relative to a year ago. The practice continues to support private parties and regulators on a variety of new and continuing M&A-related engagements in North America and Europe. The engagements span a broad range of industries, including technology, transportation, telecommunications, and healthcare, and require our experts to assess the characteristics of product and geographic markets, among other considerations. For example, during the third quarter, a CRA team advised OCP Repartition, a subsidiary of McKesson Europe, and Phoenix Group regarding their merger, which was reviewed by the French Competition Authority and the European Commission. The deal involved overlaps in the wholesale and retail distribution of pharmaceutical goods in several European countries. The regulators considered both local markets and a national market, taking into account the buying power of the pharmaceutical purchasing groups. CRA played a pivotal role in showing the role of PPGs and the increasing competitive constraints from players evolving outside the defined markets, convincing the French Competition Authority to accept the proposed behavioral remedies, that followed the unconditional clearance by the European Commission. Turning to the broader legal market, CRA's revenue from legal and regulatory offerings during the third quarter grew 14% year-over-year. This expansion exceeded mixed market trends as total case filings during the third quarter increased 7% year-over-year, while total court judgments were down 9% year-over-year. CRA's antitrust and competition economics practice continue to support clients in the context of legal disputes in addition to their merger-related work. For example, in a high-profile class action litigation, CRA is retained to analyze class certification issues on behalf of a joint defense group that comprise some of the nation's largest transportation companies, truck driver plaintiffs, alleged nationwide no poaching conspiracy among long-distance trucking companies that would reduce drivers' information about job opportunities, restrict labor mobility, and suppress wages. Plaintiffs sought more than $100 million in antitrust damages. The CRA team's analysis showed that the foundation of plaintiffs and their experts' class-right theory of harm was false. The court denied class certification but allowed named plaintiffs to pursue their claims individually. The matter settled favorably for serious clients, while a ruling on summary judgment motions was pending. Our finance practice was active during the third quarter, providing expert services in all of its areas of focus, including merger litigations in Delaware Chancery Court, in which our experts analyzed issues related to material adverse events, the fairness of deal prices and industry conditions, matters arising from allegations of spoofing and manipulations of financial markets, securities fraud litigations, instances of an instance, insurance, I'm sorry, and investment litigation, including matters for insurance companies related to cost of insurance and the California lapse law, and international arbitration and in which our experts provide testimony on valuation and damages issues in venues around the world. Within our labor and employment practice, CRA continues to be engaged by clients to assist in all aspects of litigation, including the initial phase of data collection, as well as later phases of expert testimony and post-agreement monitoring. As clients approach annual compensation adjustment cycles, CRA's labor and employment practice is regularly retained to examine pay equity issues that can be complicated by reorganization actions taken by companies adjusting to changing markets. For example, a CRA team is currently assisting a national healthcare provider to examine pay equity post reorganization, identify potential areas of concern, and provide guidance in the implementation of appropriate pay adjustments. The practice continues to benefit from the new colleagues who joined CRA as part of the acquisition of Welch Consulting. Our integration has continued according to plan, and we're benefiting from greater scale. For example, the practice is leveraging the expanded network of PhD labor economists to identify and recruit new PhD candidates at the upcoming Allied Social Science Association's annual meeting and job market. Within our management consulting offering, the energy practice assisted clients in numerous ways with the ongoing transformation of the energy industry and the decarbonization of the energy sector. We continued our work in utility resource planning, helping multiple utilities make strategic decisions regarding investment decisions and customers' impacts. We also continue to assist the investment community and advise the large infrastructure fund and its evaluation of a nuclear power technology company and a large infrastructure investor and its operations of energy and water assets. Finally, we continue to work with the legal community supporting disputes related to power generation, gas pipelines, and international project development. During the third quarter, CRA's auctions and competitive bidding practice launch its inaugural series of global dairy trade pulse auctions. CRA enhanced its trading platform to facilitate auctions on a weekly and potentially daily basis. Additionally, CRA is working with Duke Energy's North and South Carolina franchise utilities to identify solar energy projects for the development in the regions. Solar procurement is a critical element of the company's carbon plan. As mentioned in prior calls, our life sciences practice has been gaining momentum. After adjusting its revenue for currency headwinds in the third quarter, the practice is back on a growth trajectory. During the quarter, the practice continued its work in rare diseases and oncology, helping one of our clients to identify pediatric patients suffering from from an ultra-rare genetic disease and building the patient's journey for potential new second-line product in the fight against lung cancer. In addition, the practice continues to support the design, implementation, and testing of a major business intelligence platform at a longtime client as part of its investment in digital business transformation efforts. As always, I'm grateful to all my colleagues for their hard work and helping our clients address their most important challenges. Moreover, as our third quarter results demonstrate, our portfolio of services remains highly valued by our clients. We are well positioned to maintain the momentum in the business as we continue to replenish our sales pipeline. In the third quarter, project lead flow grew by roughly 6% year over year. Notably, we saw an acceleration of project lead flow during the quarter, culminating in a surge of 30% greater lead flow this September relative to last September. Reflecting the continued strength and quality of our business, we are raising our revenue and profit guidance. For full year fiscal 2022, on a constant currency basis relative to fiscal 2021, we expect revenue in the range of $600 million to $608 million, and non-GAAP EBITDA margin in the range of 12.5% to 13%. This new guidance compares with a prior revenue range of $585 million to $605 million and a prior non-GAAP EBITDA margin range of 11.3% to 12.0%. With that, I'll turn the call over to Chad and then Dan for additional comments. Chad?

Thanks, Paul. Hello, everyone. I want to update you on our capital deployment initiatives during the quarter. CRA continues to generate strong cash flows. For the trailing 12 months through the third quarter of fiscal 2022, CRA's adjusted net cash flows from operations were $57.3 million. As Dan will describe in greater detail, we concluded the quarter with $24.1 million of cash and cash equivalents, and $45 million of borrowings under our revolving credit facility, resulting in a net debt position of $20.9 million. These figures reflect $25 million of payments during the quarter to reduce borrowings under our revolving credit facility. The third quarter of 2022 also saw cash outlays for talent investments of $3.3 million. We spent $900,000 on capital expenditures, bringing the year-to-date total to $3 million. We returned $7.2 million of capital to our shareholders during the third quarter, consisting of $2.2 million of dividend payments and $5 million for share repurchases of approximately 52,000 shares. We have approximately $22.9 million available under our share repurchase program. Finally, demonstrating confidence in our long-term outlook and reflecting our commitment to return capital to shareholders. Earlier today, we announced a 16% increase in our quarterly cash dividend from 31 cents to 36 cents per common share. This dividend will be payable on December 9th, 2022 to shareholders of record as of November 29th, 2022. Our objective remains to maximize the long-term value per share, and CRA's portfolio continues to perform at a high level. We are driving profitable growth while at the same time returning significant dollars back to our shareholders. With that, I will turn the call over to Dan for a few final comments. Dan?

Thanks, Chad. As a reminder, more expansive commentary on our financial results is available on the investor relations section of our website under prepared CFO remarks. Before we get to questions, let me provide a few additional metrics related to our performance in the third quarter of fiscal 2022. In terms of consultant headcount, we ended the quarter at 911, which consisted of 146 officers, 481 other senior staff, and 284 junior staff. This represents a 3.3% increase compared with the 882 consultant headcount reported at the end of Q3 fiscal 2021. By the end of the year, we expect consultant headcount to be up 7% to 8% year over year. Non-GAAP selling general and administrative expenses, excluding the 3.2% attributable to commissions to non-employee experts, was 15.8% of revenue for the third quarter of fiscal 2022, compared with 14.8% a year ago. This quarter's percentage was primarily impacted by an increase in travel and entertainment expenses. The effective tax rate for the third quarter of fiscal 2022 on a non-GAAP basis was 25.3% compared with 14.8% on a non-GAAP basis for the third quarter of fiscal 2021. The higher rate in the third quarter of 2022 was largely attributable to a lower benefit arising from the accounting for stock-based compensation. Turning to the balance sheet, DSO at the end of the third quarter was 123 days, compared with 117 days at the end of the second quarter of fiscal 2022. DSO in the third quarter consisted of 77 days of billed and 46 days of unbilled. DSO typically follows a seasonal pattern with increases in the second and third fiscal quarters and a reduction in the fourth fiscal quarter. The fourth quarter DSO reduction has averaged 10% in each of the last two fiscal years, and based on the quality of our receivables and strength of our cash collections quarter to date, we expect a similar reduction in the fourth quarter of fiscal 2022. We concluded the third quarter of fiscal 2022 with $24.1 million in cash and cash equivalents and a further $150.6 million of available capacity on our line of credit for total liquidity of $174.7 million. That concludes our prepared remarks. We will now open the call for questions. Rob, please go ahead.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. One moment, please, while we poll for questions. Our first question comes from Mark Riddick with Sedonian Company. Please proceed with your question. Hey, good morning.

Morning, Mark.

So I wanted to start on your commentary as far as the lead flow and the ramp-up that you're seeing there. Could you talk a little bit about maybe sort of where that's, where that's coming from and sort of a ramp up in demand given sort of the macroeconomic picture. Maybe you could sort of put the two together to sort of give us a little bit of a broader view of what you're seeing there.

Sure, I'll give it a shot. First, I'll begin with who we're seeing the lead flow originate from. And there, just like our performance, it's been pretty broad-based. I'm seeing contributions from our legal regulatory practices and I'm seeing substantive contributions from our management consulting practices. So I've seen no imbalance in terms of those contributions relative to their revenue performance. Secondly, when we were sitting in July-August, it wasn't necessarily as encouraging. because we were basically flat year over year when I looked at lead flow. Once post-Labor Day, we started seeing an increase in the inbound opportunities, and that led to a very strong month of September and a pretty strong quarter given the overall market conditions.

That's very encouraging, actually. I wanted to shift gears a little bit. You mentioned the commentary as far as the pullback in global M&A, which we've talked about, and that's really kind of been going on and accelerated, I guess, throughout the year. So I wanted to talk a little bit about your usage of consultants. And I know when things were kind of ramping up, some consultants were kind of shifted over to that area. Have we seen much of a back and forth as far as, where some consultants are being put to use there and how that might relate to the M&A slowdown.

Sure. Our antitrust and competition economics practice is truly a well-oiled global practice. They regularly use consultants across their offices and also regularly So we continue to see that type of sharing of resources, which has been a nice way to contribute to the stable performance you see out of CRA quarter after quarter. So again, it's not forced on the competition practice. More often than not, the keep their consultants busy, but sometimes one practice surges ahead of another, and we try to do our best to provide them the resources they need.

Great.

And then I wanted to – the margin performance has certainly been really good. I was wondering if you're seeing much – Certainly, you can't really tell by the SG&A as a percentage of revenue, but I was sort of curious as to whether or not you're beginning to see a little bit more clients requiring in-person face-to-face activity and maybe as a piggyback off of that, maybe what you're seeing as far as your own you know, sort of return to physical office kind of behavior, maybe relative to expectations or maybe where you thought things would be?

So I'll start with the first question that you asked in terms of clients demanding more in-person opportunities. Whenever CRA has an opportunity to meet with our clients, to hear about their needs and to share our insights, we jump at that opportunity. but the mix of whether that opportunity takes place virtually or in person has been relatively steady throughout the 2022 year. There's always a bit more conferences as we go into the fall, so some of the increased travel and incidentals are related to our attending of conferences where we oftentimes have speaking and coordinating responsibilities. The other part you mentioned about our return to the office, we actually gathered our vice presidents for the first time in three years in September at a company-wide meeting. It was the largest attendee list of VPs we've ever had at CRA and there was great energy. Zoom has been a fantastic vehicle for us to use in connecting with people, but really nothing is a substitute for in-person engagement. So we're really happy coming out of that September meeting. That, of course, contributed a little bit to the increase in SG&A levels, but as we've talked about in the past, on a steady-state basis, I think I'm aiming to have our SG&A levels right around 15.5% or so.

Okay, and then the last one for me, at least for now. I was wondering if you could talk a little bit about – certainly you're very U.S. heavy, but I was wondering if you could talk a little bit about what you're seeing with activity in the U.K. and maybe how that performance has been relative to your expectations.

Yeah, the reason I restated or – the European growth of our units there is because they are selling more hours. How those hours convert into revenue because of exchange rate pressures is really nothing to do with the success they are having in the marketplace. So although the reported results are more heavily influenced by North American operations, Anytime I see a region comprising 20%, 25% of our company expanding by 16% on a constant currency basis gives me a lot of optimism for the quarters and years ahead.

Excellent. Thank you very much. Thank you, Mark.

As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. One moment, please, while we poll for questions. There are no further questions at this time. At this point, I'd like to turn the call back over to Paul Malley for closing comments.

Again, thanks to everyone for joining us today. We appreciate your time and interest in CRA. We will be participating in virtual meetings with investors in the coming months, and we look forward to updating you on our progress on our year-end call. This concludes today's call. Be well, everyone. Thanks.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.