CRA International Inc (CRAI) 2021 Q4 法說會逐字稿

Good day, everyone and welcome to Charles River Associates Fourth Quarter and Fiscal Year 2021 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 Maleh; 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 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 extent and duration of the impact of the COVID-19 pandemic on our financial condition and results of operations.

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 with 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.

We have also provided certain quarter-over-quarter percentage changes on an adjusted basis to show those changes as if Q4 of 2020, which had 14 weeks, included the same number of weeks as Q4 of 2021, which had 13 weeks and reflects a pro-rata reduction equal to one week of Q4 2020 results. 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's fiscal 2021 topped a record-setting fiscal 2020 as revenue increased by 11% to $565.9 million. Capitalizing on this revenue growth, CRA also posted record profits as non-GAAP net income, earnings per diluted share and EBITDA grew 57%, 64% and 35%, respectively, compared with fiscal 2020.

CRA's revenue growth was balanced geographically as both our North American and International operations increased by 11%. Our expansion was led by legal and regulatory services, which grew by 19% year-over-year. Six practices, specifically our Antitrust & Competition Economics, energy, financial economics, intellectual property, labor and employment and risk investigations and analytics practices delivered double-digit revenue growth.

For the fourth quarter, reported revenue declined 1.9% compared with the fourth quarter of fiscal 2020. As Dan just mentioned, when considering year-over-year growth rates it's important to note that the fourth quarter of fiscal 2020 contained one more week than the fourth quarter of fiscal 2021.

After making a one-week pro-rata adjustment to the fourth quarter of fiscal 2020, CRA's revenue expanded by 6% in the fourth quarter of fiscal 2021, demonstrating the continued expansion of our business. Leading the way with double-digit revenue growth were our Antitrust & Competition Economics, energy, and risk investigation and analytics practices.

For the firm as a whole, headcount increased 3.6% year-over-year and utilization reached 72% for the fourth quarter. CRA's fourth quarter topline expansion once again resulted in profits increasing faster than revenue. Non-GAAP net income increased 15%, earnings per diluted share increased 20% and EBITDA grew 9% year-over-year.

I would now like to spend a few minutes highlighting some of the services provided during the fourth quarter. Within Legal and Regulatory, our Antitrust & Competition Economics practice recorded its second highest quarterly revenue ever as M&A markets remained strong. Worldwide transaction activity reached $1.5 trillion in the fourth quarter of 2021, marking the sixth consecutive quarter to surpass $1 trillion of deal activity and ranking as the second largest quarter for worldwide M&A activity.

Against this backdrop, CRA worked on transactions across a range of industries and geographies. For example, during the fourth quarter, a CRA team presented economic analysis to the Federal Trade Commission in support of the third party concerned about the effects of the Lockheed Martin's proposed $4.4 billion acquisition of Aerojet Rocketdyne would have on innovation and prices.

If permitted to proceed, this merger would have eliminated the last independent provider of propulsion, a critical input for guided missiles produced by Lockheed and other defense prime contractors. The CRA team developed and presented to the FTC, a vertical merger simulation model of bid competitions for defense and other industries that quantified the foreclosure effects of the combination.

On January 25, 2022, the Federal Trade Commission voted 4 to zero to challenge the acquisition, and 3 weeks later, Lockheed Martin abandoned the merger.

Additionally, colleagues from our European competition practice advised Microsoft and Nuance on Microsoft's $19.7 billion acquisition of Nuance, a global provider of speech recognition AI for the healthcare sector. The European Commission investigated the horizontal overlap between the parties in transcription software, several vertical and conglomerate links between the parties' products as well as whether access to Nuance data would allow Microsoft to distort competition to the detriment of competing healthcare software providers.

On December 21, 2021, the European Commission unconditionally cleared the acquisition, concluding that none of those theories of harm raised competition concerns.

Looking more broadly at the legal market, trends in activity levels were mixed. Total case filings during the fourth quarter of 2021 were down 9% year-over-year, which was an acceleration relative to the year-over-year decline of 3% observed in Q3. Within the courtroom, the number of total court judgments during the fourth quarter was up 1% relative to the fourth quarter of 2020. This reflected a significant slowdown from the approximately 20% year-over-year increase observed in Q3.

In light of these market conditions, the performance of our legal regulatory services during the fourth quarter is especially noteworthy. The group expanded by 3% year-over-year or 11% after adjusting for the extra week in the fourth quarter of fiscal 2020.

In addition to their merger-related -- merger review work, CRA's Antitrust & Competition Economics practice continued to support clients in the context of legal disputes. During the fourth quarter, CRA experts were retained by private parties and regulators on a variety of antitrust investigations, including matters addressing price-fixing, monopolization and merger-related claims. These projects have touched industries as wide-ranging as high tech, entertainment, transportation and food and agriculture.

Within our Labor & Employment practice, CRA provided a statistical review and analysis of employee interchange associated with ongoing petitions in front of the National Labor Relations Board to establish location-specific collective bargaining units.

In another matter, CRA assisted in the review and reconciliation of 4 years of payroll and time-keeping data to assess unpaid regular rate overtime premium payments and California meal and rest premium payments related to a recent California Supreme Court decision. CRA's calculation were the basis of individual employee payments and the settlement of the alleged class action matter.

In addition to this important client work, I'm also extremely excited about the announcement we made earlier this week regarding CRA's acquisition of Welch Consulting. At a time when issues of fair treatment in the workplace are receiving more attention, this transaction approximately doubles the size of our labor and employment practice as Welch Consulting has averaged $15 million of annual revenue over the past 3 years.

The Welch Consulting team consists of approximately 45 consulting and corporate colleagues who share CRA's cultural commitment to exceptional client service. On behalf of everyone at CRA, I want to extend a warm welcome to our new colleagues.

During the fourth quarter, the risk investigations and analytics practice executed a range of large multi-disciplinary investigative assignments within the United States and abroad, including assisting outside counsel in an internal fraud investigation involving conflict of interest and proper payments to company management by the Company's customers and vendors.

A team of data analysts, forensic accountants and digital and investigative staff collected and analyzed more than 10 years of financial data and conducted detailed transaction testing to identify the size and scope of the improper activity which results -- with results briefed to the US Department of Justice.

The practice also assisted plaintiffs council in a complex theft of trade secret matter spanning multi-jurisdictions in Asia, Latin America and the United States. Through the on-ground deployment of investigative resources and the use of sophisticated analytic tools, CRA helped verify potential violations of US court issued injunctions and provided political context and background to counsel regarding counterparties.

The risk investigations and analytics practice continues to establish itself as the go-to provider of due diligence services for banks and underwriters counsel with respect to initial public offerings.

Within our management consulting offering, the energy practice continued to grow its core business of advising to the energy industry as well as providing expert opinions in energy disputes. For example, the practice helped the European utility improve operations at its subsidiary in support of a carve-out, provided resource planning services for US utility and provided testimony in a major case related to gas pipeline acquisitions.

We also have expanded our offerings to support a client and operational improvements at a major water distribution utility. I'm grateful to all my colleagues for their hard work as we helped our clients address their most important challenges.

Recapping our record financial performance, CRA reported revenue for fiscal 2021 of $565.9 million or $559.5 million on a constant currency basis after adjusting for the $6.4 million of currency tailwinds. Full year non-GAAP EBITDA was $68.4 million or $67.7 million on a constant currency basis after adjusting for $0.7 million of currency tailwinds. Non-GAAP EBITDA margin was unchanged on a constant currency basis at 12.1%.

Our fiscal 2021 financial performance demonstrates our continued strength in the marketplace. We will look to build on our trend of broad-based profitable growth in the years ahead. For full year fiscal 2022 on a constant currency basis relative to fiscal 2021, we expect revenue in the range of $585 million to $605 million and non-GAAP EBITDA margin in the range of 10.8% to 11.5%.

While we are pleased with CRA's strong performance in 2021, we remain mindful that short-term challenges arising from uncertainties around macroeconomic, business, public health and political conditions can affect our business.

Before I turn the call over to Chad and Dan, I would like to highlight one final item. Earlier today, CRA published its inaugural sustainability report. This report formalizes CRA's ESG framework and describes our efforts across 4 key areas: employee empowerment, community advancements, ESG advisory services and environmental stewardship. I encourage you to review this report, which is now on our website, and I look forward to providing updates on our progress.

With that, I'll turn the call over to Chad and then Dan for a few additional comments. Chad?

Thanks, Paul. Hello, everyone. I want to update you on our capital deployment initiatives during the quarter. CRA once again generated strong cash flows. For fiscal 2021, CRA's adjusted net cash provided by operating activities was $100.6 million or 17.8% of fiscal 2021 revenue. Demonstrating our commitment to values creating growth, our fiscal 2021 adjusted net cash provided by operating activities was 4% higher than a year ago and has increased 59% over the past 3 years and 85% over the past 5 years.

The fourth quarter of 2021 saw cash outlays of $4.9 million for forgivable loans in connection with talent investments. We also spent $900,000 on capital expenditures, bringing the full year amount to $2.6 million. For fiscal 2022, we expect to spend $5 million to $6 million on capital expenditures.

We returned $7.4 million of capital to our shareholders during the fourth quarter, consisting of $2.4 million of dividend payments and $5 million for share repurchases of approximately 51,000 shares. For the full year, we returned a total of $53 million to our shareholders through a combination of share repurchases and quarterly dividends. This represents 53% of CRA's 2021 adjusted net cash flows from operations and exceeds our previously stated aim of returning half of our adjusted cash flows from operations to shareholders.

During the quarter, we also repaid $6 million of our borrowings under our revolving line of credit to bring our year-end outstanding debt to $0, as we have typically done in prior years. Our cash balance increased during the quarter by $46.5 million to end the year at $66.1 million.

We continue to have confidence in our long-term outlook as we look to invest in the business for profitable growth while simultaneously returning meaningful capital to our shareholders. Furthermore, as announced on February 7, CRA's Board of Directors authorized an expansion to our existing share repurchase program of an additional $20 million in value of shares of our common stock. With this expansion, we have approximately $50.5 million available under our share repurchase program.

With that, I'll 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 fourth quarter of fiscal 2021.

In terms of consultant headcount, we ended the year at 861, which consisted of 140 officers, 477 other senior staff and 244 junior staff. This represents a 3.6% increase compared with the 831 consultant headcount reported at the end of fiscal 2020.

Non-GAAP selling, general and administrative expenses, excluding the 2.9% attributable to commissions to non-employee experts was 16.1% of revenue for the fourth quarter of fiscal 2021 compared with 13.9% a year ago. This quarter's ratio was impacted primarily by an increase in travel and entertainment expenses. For the full year fiscal 2021, the ratio was 14.2% compared with 15.2% for full year fiscal 2020. We will continue to monitor our discretionary expenses to properly manage risk and proactively mitigate the financial impacts related to the pandemic.

The effective tax rate for the fourth quarter of fiscal 2021 on a non-GAAP basis was 27.4% compared with 26.2% on a non-GAAP basis for the fourth quarter of fiscal 2020. The higher rate in the fourth quarter of 2021 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 fourth quarter was 101 days compared with 112 days at the end of the third quarter of fiscal 2021. DSO in the fourth quarter consisted of 70 days of build and 31 days of unbilled. We concluded the fourth quarter of fiscal 2021 with $66.1 million in cash and cash equivalents and a further $170.8 million of available capacity on our line of credit for total liquidity of $236.9 million.

That concludes our prepared remarks. We will now open the call for questions. Rob, Please go ahead.

(Operator Instructions) Our first question comes from Andrew Nicholas with William Blair.

The first one I wanted to ask you just on the margin outlook for 2022. I was hoping you could kind of walk us through the puts and takes there. How much of the year-over-year trend or contraction is a consequence of higher labor costs versus certain SG&A expenses coming back online post COVID versus any other factors worth calling out?

Fine, Andrew. So you're right, there are a lot of factors impacting what goes into our EBITDA guidance. I would just warn people to view the guidance range provided as a contraction for a couple of reasons. One, embedded in our EBITDA margin in any given year is a large non-cash charge called our forgivable loan amortization. So the actual cash profitability, as I would describe it, may differ from that portrayed as EBITDA margin when you add EBITDA margin to the forgivable loan amortization.

Historically, our not forgivable loan amortization hovers around 6%. In 2022, we expect that to be roughly about 50 basis points higher as we have a number of talent investments coming online with expected performance awards and also in anticipation of some additional talent investments that we have in our queue in the market. So the guidance range was 10.8% to 11.5%. I think if you take in consideration the forgivable loan amortization, the difference year-over-year is negligible.

I guess for my follow-up, I was hoping you could add a bit more color on the size of the current pipeline and how that's evolved over the past couple of months? And then within that question, also I was hoping you could speak to whether there's been any noticeable change in the size and/or length of projects you're seeing added to the pipeline, particularly on the antitrust side.

I think one of the things that we're certainly watching or we read about quite a bit is some potential headwinds to large-scale M&A. And just wondering how you're thinking about that dynamic within the project size dimension.

Sure. Just one clarification question that I have since we were just talking about forgivable loan amortization and talent investments, when you use the term pipeline, are you referring to our talent acquisitions? Are you referring to lead flow and new project originations?

Yes, my apologies. I was switching topics all together on you. So I was referring to the latter.

Okay. Great. So we did see a slowdown in activity during Q4. Our new project originations during Q4 were down roughly about 3.5% give or take. In the second half of the year, we were up about 4% on new projects year-over-year. And for the entire year of 2021, we were up about 18%.

So you can see we have been experiencing some headwind in the litigation marketplace. I really believe that it's tied to what we're observing and what we have shared with investors with respect to the legal market as a whole, specifically the total case filings and the case decisions flowing through the core system. We anticipate as Omicron continues to subside and decline, we will see that pickup in activity as we get -- as we continue into 2022.

And with -- and the last one, I think you mentioned, I'm sorry, on the M&A activity and the outlook, we're all waiting to see exactly how all the various factors will impact global M&A activity. What I can tell you is, to date, we haven't observed any slowdown, both in terms of the macro statistics that I quoted and in terms of the lead flow coming into CRA, both here in the states and in Europe.

Our next question comes from Kevin Steinke with Barrington Research.

I wanted to follow up just on the margin outlook for this year. Obviously, we are anticipating that some SG&A expenses would continue to come back as the pandemic subsides. And you had talked about maybe that SG&A excluding commissions, settling out at about a little over 16% of revenue, and that's where it landed in the fourth quarter of '21. Is that still a reasonable benchmark or level to think about for 2022, maybe that 16% plus level for SG&A?

Sure. As you could imagine, that -- first of all, good morning, Kevin, I'm sorry about that. As you can imagine, the level of SG&A activity and specifically travels and incidentals has a lot to do with the state of our world as it relates to the pandemic.

So are we going to be returning to the office? Are our consultants going to be traveling more? Are the clients willing to accept our consultants onto their premises? If we reach more of what I would call a steady-state exit from this pandemic and activity looks more similar to 2019 than it did in 2021, I would expect SG&A, excluding performance payments, to be in the range of about 15.5% to 16% of net revenue.

And what is kind of the state of your consultant basis now in terms of working from home versus returning to the office. I think you've always taken the approach that your offices are open if someone wants to come in. But I suppose that hasn't necessarily happened recently with Omicron. But what do you anticipate or what trends do you think you'll see -- or are you seeing? And is there some point where you just -- you want to just get everyone back into the office?

I think the biggest change that I can describe as a pre-pandemic to what we hope to achieve, like here in the States as we will be asking our colleagues to begin returning to the office the beginning of April. CRA has always afforded its consultants and our corporate team flexibility as to how they complete their work. By that, I mean the hours they're keeping, what -- the time they're spending in the office versus at home or on the road at client sites. We've always afforded them that flexibility.

I think the one thing the pandemic has done has required us to be more explicit as to what we mean by flexibility, particularly with a company that has been as fast growing at CRA, many of our colleagues don't have a long pre-pandemic history to know what is the norm. So we are working on being more explicit with what we mean by flexible or a hybrid type of situation.

We are also working much harder on being explicit as to what are the benefits when people come to the office. If the only benefit you are providing to our colleagues when they come to the office, as you have a new desk other than the one at your home, that's not going to cut it in today's world. So you need to be more explicit as to the gathering of individuals, the sharing of ideas, the innovation process that happens when people get to interact in a more haphazard matter on it.

So all of these things are adjustments that we have in place and hopefully make for a more welcoming and productive office environment as my US colleagues begin to return to the office beginning of April. And Europe has been a bit ahead of us with respect to their return to the office, so they've been returning in larger numbers for the last, say, 4 to 8 weeks.

And you talked last quarter about seeing some heightened vacation time among consultants, and that's not really something you can control. But what are the trends you're seeing there? And I actually noticed at a recent conference appearance you were actually talking about maybe encouraging some vacation usage, just given the separation between the office and being at home and maybe that would be beneficial for consultants. So just any color commentary on that would be interesting.

Yes. This has been a challenging 2 years with respect to forecasting activity, not just revenue, but a lot of the inputs that go into the determination of revenue. Vacation usage is clearly one of them. You went from all-time lows in vacation usage in 2020 to more all-time highs during the second half of '21 on vacation usage. The other thing we're trying to balance is the so-called -- the potential for increased attrition rates as people ponder their future on the return to the office on that. So there's a lot of variables that are going into it.

The last thing I want is, because we've been busy for such an extended period of time, is my colleagues to feel they do not have the ability to take time off. Because if that ends up being the feeling of our colleagues, you're going to have the attrition increase, which is much more costly than higher-than-expected vacation usage.

So it's -- although we had a higher second half of 2021, I expect us to start going towards the pre-pandemic mean on vacation usage. I don't expect anything out of the ordinary in 2022. We're also going to work hard to keep attrition rates in 2022 to be consistent with pre-pandemic levels, which I should note in 2021 for the year as a whole, the aggregate attrition rate at CRA was consistent with rates observed in years prior to the beginning of the pandemic.

And then just lastly, I wanted to ask about the acquisition of Welch Consulting, and you don't do too many acquisitions and just what attracted you to them? And how did it come about? And roughly how many consultants does it add? I know you said 5 at the VP level, 45 staff total, any maybe metrics like revenue contribution or anything else they could share would be helpful.

We've been admiring Welch Consulting for probably about 15 years now. We have shared our admiration to Welch, to them at previous times. And tragically, about 1.5 years ago, the founder of Welch, a really brilliant man and great entrepreneur, Finis Welch passed away. And there was a transition in place within that firm.

We began talking to the principles at them. We shared a lot of the same sentiment we had shared previously. And there started to be a meeting of the minds where they agreed that CRA would be a really productive home for that. So we were honored that they selected CRA in this process. We welcomed 45 total employees joining us; of that, 40 of them are on the consulting side of the operation.

Our next question is from Marc Riddick with Sidoti & Company.

So I wanted to continue on that thread a bit, and thank you for the color on how Welch came to be, because quite frankly, that was going to be my first question.

So I wanted to follow up with that as to maybe how that -- is there sort of a general view of what you're seeing right now, the overall acquisition pipeline as Welch was your first purchase in about 5 years. And also just thinking through, with emerging from the pandemic, whether the acquisition pipeline for you looks maybe a little different than it did maybe even 6 months or a year ago?

Sure. Again, I have nothing but accolades and excitement about the addition of Welch Consulting to CRA. The one qualification I want to make with, I think, both the statement that you made, Marc, and also a statement that Kevin made, yes, CRA has not had a lot of what I would call formal accounting acquisitions like we did for Welch Consulting, like we did for C1 Consulting.

But we are constantly in the market for revenue-generating talent. Sometimes they take the form like they did in C1 Consulting and Welch Consulting, but a lot of times, they're individual recruits or group hires, and we actually have had a number of those in the past half dozen years. So we don't necessarily define the acquisition vehicle, we're just looking for top talent to join the CRA family.

So I think our pipeline is -- of talent opportunities is rather robust. But as we shared with you during this pandemic, the lead time and the courtship timeline has been longer during the pandemic, just because of the difficulty of meeting in person for having broader groups to meet with the prospective candidates has slowed. So just the courtship period is a bit longer, but the actual pipeline is as rich as we've ever seen it at CRA.

And then I want to circle back to something you made some comments around, but I wanted to get a little bit more flavor around it. The pace of filings, litigation filings, I was sort of thinking through -- I think you touched on it, but I want to make sure I sort of interpreted this properly, is that, it seems as though there was somewhat of a connection as far as that pace slowing down with the timing of the Omicron variant. And is there any reason to believe that there were any other factors other than just the rise of the [land] and sort of the impact that it had on society?

To the best of our ability in terms of reading all the tea leaves, reading the activity levels of our law firm clients, tracking mergers and second requests at the various commissions, looking at the performance of our peers, I have not seen CRA's performance to be out of line with what we are seeing.

Thus, I don't have evidence right now to say we are losing market share, that CRA's experience is an aberration relative to what we are observing in the market as a whole. If anything, I do believe we've actually been increasing our market share over the last several years. But it's something we're closely tracking.

You never want to take the easy road and just say, oh, these are market variables impacting your performance. You have to be critical as to what is happening. If it is Omicron and the lack of in-person activity that is impacting court activity, then we need to adjust as a firm to be more effective in operating in that environment. But to date, I feel comfortable that we're doing the right things and that we are not falling behind the market as a whole.

And the last question for me is, I was sort of curious as to whether or not there are any particular practice areas that may -- that you think have been accelerating a bit that maybe we haven't had the chance to talk about or highlight or maybe any particular spaces where you're maybe a little more positive on currently, given the current climate that maybe folks -- that might be a little under the radar for some of the folks like us.

Yes. I don't know whether I would say any of them are under the radar. We do our best to try to highlight what I would call exceptional performance of parts of our unit. You always have to begin and end with what the performance has been of our Antitrust & Competition Economics practice.

They -- once the M&A marketplace returned to some level of normalcy during the second half of 2020, they really have been going like gangbusters. So a lot of accolades go out to our practice here in North America and over in Europe with that performance.

You have opportunities like we highlighted in labor. When I say we are always looking for investment opportunities for all parts of our portfolio, we mean it. We mean it. We loved the little gem we had in our labor practice at CRA, and have been looking long and hard of how we can make that practice even stronger.

But this also demonstrates the commitment to only bring on the right type of people into your organization. Bigger is not always better. And our 15-year patients with the core chip of Welch paid off. As I've said previously, I would love to have opportunities to continue to expand our energy practice.

I really think they are underrepresented in scale in the marketplace and CRA can do a better job to support them with finding the right investment opportunities in Europe and in North America for that unit. But I don't have any, what I would call, information that I haven't either shared on this call or previously about our portfolio and growth opportunities.

We've reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to management for closing comments.

Again, thanks to everyone for joining us today. We appreciate your time and interest in CRA. We'll be participating in virtual meetings with investors in the coming months and, who knows, maybe in-person meetings as well. And we look forward to updating you on our progress on our first quarter call. Be safe. And with that, that concludes today's call. Thank you.

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