CRA International Inc (CRAI) 2012 Q4 法說會逐字稿

Good morning and welcome to Charles River Associates fourth quarter fiscal year 2012 conference call. Today's call is being recorded. You may listen to the webcast on CRA's website located at www.CRAI.com. In addition, today's news release and prepared remarks from the Company's Chief Financial Officer are posted on the investor relations section of the site.

With us today are CRA's President and Chief Executive Officer, Paul Maleh, and Chief Financial Officer, Wayne Mackie. Also joining us today is Margaret Sanderson, VP and Practice Leader of Antitrust and Competition Economics. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Mackie. Please go ahead, sir.

Thank you, Kevin. Statements made during this conference call concerning the future business; operating results; anticipated, expected, or intended impacts of restructuring actions and key hires; estimated cost savings; the effects of any goodwill impairment charge; and financial condition of the Company; and statements using the terms anticipates, believes, expects, should, prospects, target, on track, 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 performance and 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 and prepared CFO remarks.

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 we will be referring to some non-GAAP financial items on this call. I would encourage everyone to refer to today's earnings release for a full reconciliation of these non-GAAP items to their GAAP equivalents. Let me now turn it over to Paul Maleh for his report. Paul?

Thanks, Wayne, and good morning, everyone.

Our fourth quarter performance was on track as we delivered sequential revenue growth and experienced steady demand for our services with a number of practices delivering solid results. We remain on target to realize the previously announced annualized cost of service and SG&A savings from our 2012 restructuring actions, which were largely completed during the fourth quarter. These steps allowed us to achieve a solid fourth-quarter non-GAAP performance and end fiscal 2012 in a stronger financial position.

During the quarter, we achieved sequential revenue growth. We also achieved our established target for the fourth quarter of double-digit, non-GAAP operating margin, which reached 10%.

We generated substantial cash flow from operations of more than $14 million. This was driven in part by our 17-day improvement in DSO's.

Our non-GAAP earnings per share was $0.03 per share higher than the same period a year ago, despite 10% lower revenue.

Turning to our topline performance, our results in the quarter were driven by organic sequential growth of across our portfolio. Within Litigation, our Antitrust and Economics Practice delivered another excellent quarter. This Practice delivered outstanding results throughout the year and the fourth quarter was no exception.

The Practice benefited from growth in North America and in Europe. In fact, our European Competition group posted its highest quarterly and annual revenue. Other strong contributors in the quarter were our Intellectual Property and Labor and Employment practices.

I'd like to take this opportunity to recognize our Labor and Employment practice. What began five years ago as a relatively small business for us and a good niche market has rapidly grown in quarterly revenue more than five-fold during that period. All of that growth was organic. Special thanks to David Lamoreaux, Matthew Thompson, and their team for another year of excellent work.

Within Management Consulting, we experienced improved performance from the slow start of the year led by Marakon, Life Sciences and Auctions and Competitive Bidding. In addition, we believe we will benefit from a more focused portfolio due to our exit from unprofitable Management Consulting practices during the third quarter.

We continue to demonstrate our focus on core offerings and organic growth complemented by recruiting senior-level strategic hires. As I mentioned, on February 1, a 40-person litigation consulting team joined CRA, which is comprised of 34 consulting employees and six senior consultants to CRA. The team includes leaders Kevin Murphy, Bob Topel, Mark Zmijewski, and Nicholas Weir.

Originally we planned for these four leaders to join us in May. We negotiated to have them and their consulting team transitioned to CRA on February 1. Other highly regarded senior-level consultants who joined us as part of this agreement include Vice Presidents Keith Bockus, Sean Durkin, and Janice Halpern.

We are excited to have the entire group on board. They bring additional depth and scale to many of our litigation consulting capabilities, including antitrust and competition economics, financial accounting and valuation, financial market, and labor and employment.

We also announced that two prestigious economists who have high leadership roles in government opted to rejoin CRA as senior consultants. First, Carl Shapiro selected to return to our Antitrust and Competition Economics Practice in November 2012. Carl spent 11 years at CRA until 2009, when he left to become Deputy Assistant Attorney General for the Antitrust Division of the Department of Justice, leading the Antitrust Division's Economic Analysis Group.

Following his term at the Justice Department, President Obama appointed Carl as a member of the President's Council of Economic Advisers. Carl is an exceptional intellect and is highly respected in academic, policy, and consulting circles.

In January we announced that Fiona Scott Morton had returned to CRA, from her post as a Deputy Assistant Attorney General for the Antitrust Division of the Department of Justice. Fiona took over this position when Carl was appointed to the President's Council of Economic Advisers. Fiona's experience at the Justice Department will provide invaluable -- will prove invaluable on antitrust matters, including mergers under review by enforcement agencies as well as private antitrust cases.

With these recent additions, we believe our Antitrust and Competition Economics Practice is well-positioned to build upon its highly successful 2012. Now I'd like to introduce Margaret Sanderson, the leader of that practice, to speak more about its recent hires. Margaret?

Thank you, Paul. As Paul has mentioned, the Competition Practice is excited to work with Carl and Fiona again, and we are very pleased to welcome Kevin, Bob, and their team to our group. Frankly, we are honored that these talented academics chose CRA as a consulting firm with which they want to affiliate.

I think their decision to join CRA reflects our shared approach to client service. Like the consultants at CRA Kevin, Bob, Carl, and Fiona have a commitment to excellence in bringing rigorous independent economic insight to complicated business and regulatory issues. As well, they are exceptionally clear communicators of that analysis to clients, regulatory agencies, and triers of fact in litigation proceedings.

The fit of new colleagues with our culture and client service approach is extremely important to us. When this lines up well, it allows the new recruits and CRA's existing staff to maximize our productivity. We learn from each other and can leverage each other's expertise across a broader base of client engagements.

We've already seen the benefits of these synergies in several new leads that have passed between our legacy operations and some of our new academic recruits in the first weeks after they joined. Adding these exceptional individuals to our team expands our roster of academic who testify. Our new colleagues deepen our expertise in litigation matters involving price-fixing allegations, exclusionary contracts, damages, and class certification.

They are an excellent complement to the work our team does in high-profile merger matters, giving us additional breadth to market our services. It's also the case that teaming with experts of such high prestige made CRA an even more attractive destination for top talent. People either want to have the opportunity to manage projects for these experts or develop business and work alongside them.

While these recent academic recruits are based in the United States, they have strong links to our European practice. For example, Carl Shapiro and Damien Nevin, another CRA senior consultant based in our Brussels office, were each head of the economic teams at either the US Antitrust Division or Europe's DG Competition. As government regulators they interacted frequently and they can now bring those helpful interactions to clients at CRA, who either have international mergers or are dealing with multiple agencies investigating particular conduct.

Our European Competition team, as Paul has mentioned, is a top firm in the market, and the international expertise these former regulators bring to our practice is another great resource for meeting clients' global requirements.

In closing, it's a great pleasure to welcome back Carl and Fiona, and to welcome Kevin, Bob, and their team to CRA. And I also want to take this opportunity to thank the entire Competition Practice for their contributions to what was a very strong year for our team. I'll turn it back to you now, Paul.

Thanks, Margaret. Looking back at 2012, after a challenging start to the year, we took decisive action to eliminate underperforming assets, intensify the focus of our portfolio, concentrate resources on core assets, and continue the course we laid out in July 2012. As a result, we concluded the year in a stronger position, competitively, operationally, and financially. We have created a solid foundation from which we can profitably grow the business and we are optimistic about fiscal 2013.

With that, I'll turn things over to our CFO, Wayne Mackie. Wayne?

Thanks, Paul. Before covering some of our key metrics, I want to discuss the goodwill impairment charge that we recorded this quarter. At the end of my comments during our third quarter earnings call in October, I noted that each year in the fourth quarter we are required by GAAP to test our intangible assets, principally goodwill, for impairment. This test was just completed and resulted in a pretax goodwill impairment charge of $71.6 million, or [$57.8 million] after-tax.

This impairment is a non-cash charge to earnings, has been excluded from the Company's non-GAAP results, and does not affect CRA's liquidity position, cash flow, or our bank line of credit, nor does it have any effect on the operations of the Company.

Now I'd like to walk you through some of the key financial metrics and other factors that you should consider when assessing our Q4 2012 performance and outlook going forward. In terms of consulting headcount, we ended the quarter with 464, which consisted of 331 senior staff and 133 junior staff. This is a net decline of 21 consultants in Q4 from the 485 we reported at the end of Q3, which reflects the completion of our headcount restructuring activity.

We expect double-digit headcount growth in 2013. The recent group at hire in our Litigation Consulting business has already added 34 consulting employees to our Antitrust and Competition Economics, Labor and Employment, and Finance Practices.

Our Companywide utilization for Q4 fiscal 2012 was 68%, slightly higher than the 67% we reported in Q3 of fiscal 2012, but lower than the low to mid-70%'s level we are targeting in 2013.

In terms of our operations, clearly one of the highlights of the quarter was a reduction of our non-GAAP SG&A, which decreased on a percentage basis in Q4 to 21.9% compared with 23.7% in Q4 last year and 24.1% in Q3 of fiscal 2012.

On an absolute dollar basis, we lowered our non-GAAP SG&A by approximately $2.9 million compared with Q4 2011 and $1.1 million from Q3 2012. This is a direct result of our restructuring efforts, which included a reduction in headcount and ongoing emphasis on expense management in order to enhance our performance.

Turning to our European operations, our International revenue contributed -- contribution for the quarter was approximately 26%, which is an increase from 22% we recorded in Q3. Despite ongoing economic turmoil overseas, our European operations, specifically our Antitrust and Competition Economics Practice, delivered another excellent quarter, while Management Consulting experienced improved performance from the slow start to the year.

Our tax rate in Q4 on a non-GAAP basis was approximately 34.2%, which is significantly lower than the 47.7% we recorded in Q3. This lower tax rate, which we anticipated in our third quarter conference call, reflects the improved profitability of our European operations in combination with our exiting the Middle East region.

Our full year fiscal 2012 non-GAAP tax rate was 48.4% versus 39.7% in fiscal 2011, reflecting several quarters of usually high effective tax rates at the beginning of fiscal 2012. As we continue to benefit from our restructuring initiatives and profitable international operations, we believe our non-GAAP tax rate should return to a more normalized rate of approximately 40% for fiscal 2013.

Turning to the balance sheet, we have been focused on lowering our DSO, and I'm pleased to report that we've reduced our DSO's to 98 days at the end of the year, compared with 115 days at the end of Q3. DSO in Q4 consisted of 69 days of billed and 29 days of unbilled, compared to 77 days of build and 38 days of unbilled in Q3. Going forward, we are continuing to target DSO of 100 days or less.

In terms of our cash position, we concluded the year with approximately $55 million in cash and cash equivalents, which is up from the $42 million reported at the end of Q3. This is primarily a result of the $14 million we generated in cash from operations including improved DSO.

We did not buy back any stock this quarter.

That concludes my remarks, Kevin. We would now like to open up the call for questions.

(Operator Instructions) David Gold, Sidoti & Company.

Hey, good morning. Just a couple of questions for you. First one, obviously around, I think, this time last year, you gave some outlook as to goals for the following year, for 2012, such as your double-digit margin target. I was curious if you might want to give some color this morning on an update on that for 2013.

We are not going to be providing guidance going for 2013. What I can say is relative to where we stood here a year ago, we feel strongly that the quality of our portfolio was better in terms of the composition of our practices and their ability to grow profitably. We gave you the headcount that we ended the quarter with.

Clearly, that's going to be impacted by the addition of our new Chicago colleague. And we continue to target utilization in the low to mid-70s.

Perfect. And then, part two, can you speak about on the write-down and what particular businesses or acquisitions that came from?

David, the way the goodwill impairment is calculated is basically our market capitalization at a point in time. The GAAP requires an annual test and the test has to be done at the same point in time. And that time was early in Q4 for us.

As a result, our stock price at that time was at an unusually low level, and that drove the entire calculation that resulted in the impairment write-down. So it's really not related to a specific business per se. It's the nature and the method that is required in those calculations using market cap and the net book value of the assets we have.

The goodwill that was written down is an accumulation of goodwill that's been -- that we have had now through -- since the time we've been public. So we did not go through the exercise of looking at any particular acquisition in which one has remaining goodwill and which one doesn't here.

In fact, we really haven't added any substantial goodwill to our balance sheet since 2006. So it definitely is something that goes back in time and the low stock price was frankly the trigger.

Got you. And then on the SG&A side, is fourth-quarter run rate a good number to go on? Or should we expect a little bit more progress from the restructuring that still is under way?

I think as we mentioned, we believe we have realized the majority of the benefits from the restructuring actions that we announced in July 2012. We are going to remain diligent on our cost management, so right now I would say it's about as good a number as we have going forward. But we're always looking for opportunities to add efficiency.

Perfect. And just one last one, presumably, on the headcount adds, can you give us a sense for what area or practices, geographies, you might be focused on?

Well, the headcount adds with our Chicago group, as we said, about two-thirds of those employees are within our Competition Practice and about a third of those employees are within our Finance Practices. So going forward, outside of those acquisitions, I like the portfolio I have right now at CRA and I don't have any aversion to adding capacity and revenue generation across any of those areas.

If I have other opportunities as those presented with our new Chicago colleagues, I would do those in an instant.

Perfect. Thank you both.

Joseph Foresi, Janney Capital Markets.

Hi. Good morning. This is Jeff Rossetti, on for Joe; just a question about utilization. I was wondering if there was any impact in the quarter related to new hires if that was impacted at all. And would you expect any slowness on the utilization side, outside of seasonality, in 2013 from the headcount additions you've recently announced?

I think once the additions we announced are fully on board and integrated, they should produce very healthy utilization figures. But there is always a transition. As the people come here, go through our orientation, as we get projects transferred from one organization to another, there is bound to be some downtime and transitional aspects there. But we don't see anything as a long-term impact. These should be utilization-enhancing for our organization.

Okay. And just a broad question. I know -- just across your practices, have you seen an uptick in the number of engagements? Or are you just benefiting from taking some share and sort of being a little bit more -- benefiting from some of the new hires? Just trying to see whether across some of your major Practices like Competition, Impact, Labor and Employment, if things have improved overall in the environment out there?

I can't comment directly about the share, but what I can say is, you know as well as I do what the M&A activity has been in 2012, both with respect to the United States and with respect to Europe. The fact that our Competition group had its best year ever during that economic -- those economic conditions speaks well to their share position in the market as a whole.

So we are very proud of that performance and all we've done with these recent additions of Carl, Fiona, Kevin, and Bob, they've enhanced that position. So we expect to perform well in the market going forward.

With respect to overall lead flow and demand, it has remained relatively steady. We haven't seen any kind of significant uptick in those lead flows, nor have we seen any kind of significance deterioration.

Okay. Thanks. And last question. I know you didn't disclose terms for the 40 team -- group coming on, but any thoughts about your cash balance as of the end of next quarter? Should we expect any drastic change there? And thank you.

I guess with respect to the cash balances, clearly bringing on these kind of very notable senior hires does require capital. I would make those capital expenditures any day of the week. They should provide a very attractive return to our shareholders.

So, some of that cash will be going out during the first quarter, during the first and second quarter, are also the time we pay our annual bonuses at CRA. So we will be having quite a bit of cash outflow as part of our normal business operations but, in addition, the timing of these prominent hires.

Thank you.

(Operator Instructions) Matt Hill, William Blair.

Hi. This is Matt, in for Tim McCue this morning.

Hey, Matt.

Morning. Just one of the questions -- I know it's only been two weeks since the group has come over, but I think you had mentioned that there were some new leads that you'd seen coming in. So just wanted to kind of get a little more color on some of the opportunities you think this new group is going to bring in and where they are coming from.

Kevin Murphy is one of the leading economists in the world. Forget about in the litigations space. And the one thing I've been impressed with is not just the number of leads, but the quality of the leads.

It's the kind of leads that, as you turn pages of the Wall Street Journal or any kind of industry rag, you are seeing it on every page there, engagements that we have and had an opportunity to be a part of now, because of the addition of people like Kevin and Carl or Fiona. So I think we're going to be a prominent player in these major matters going forward.

They are not only great in terms of the prestige of the matters, they tend to be the most pressing matters for our clients. And that's where we want to be as a consulting firm. We want to be helping our clients with their most pressing challenges.

Okay. And then, also, with plans for headcount going forward, is there going to be any emphasis on maybe leveraging more of the junior consultants, especially if you're looking at working on more large cases? Is that going to require more junior guys on here?

I think, as we have been working on over the past couple of years, we've been working hard to try to right-size our pyramid, okay, to make more productive use of our officers, to have them provide more value-added services to our clients. And at the same time, if they are providing more value added services, they will give more opportunities to our more junior resources.

So we've seen improvements on our pyramid over the past couple of years. I believe we will continue to see some improvements, particularly with the additions of these key senior hires. So I think we should get some enhancement from our -- to our gross margin as a result of these contributions.

Okay. Great. Thanks.

Thank you.

At this time, we have reached the end of our Q&A session. I would now like to turn the conference back over to management for any closing or additional remarks.

Again, I just want to thank everyone for joining us today. As always, we appreciate your time and interest in CRA and look forward to updating you on progress throughout 2013. With that, this concludes today's call. Thank you.

This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.