Q3 2020 CRA International Inc Earnings Call
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David I want to thank you for joining us or teleconference only beginning shortly.
Thank you for joining swiping your teleconference will begin shortly thank you.
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Good day, everyone and welcome to Charles River Associates third quarter 2020 Conference call today's call is being recorded.
Today's release and prepared remarks from series Chief Financial Officer are posted on the Investor Relations section of <unk> website.
See our <unk> dot com.
With us today are series, President and Chief Executive Officer, Omalley, Chief Financial Officer, Dan Mahoney, and Chief Corporate Development Officer, Chad Holmes.
At this time I would like to turn the call over to Mr. Mahoney for opening remarks. Please go ahead Dan.
Thank you, Rob and good morning to 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 <unk> income.
Including those statements using the terms should expect outlook for similar terms are forward looking statements as defined in section 21 of the Exchange Act.
Permission contained in these forward looking statements is based on management's current expectations and.
Is inherently uncertain Act.
Actual performance and results may differ materially from those expressed or implied in these statements due to many important factors, including the extent in duration of the impact of the COVID-19, pandemic and our financial condition and results of operations.
Additional information regarding these factors is included in today's release in theories periodic reports, including our most recently filed annual report on form 10-K, and quarterly reports on form 10-Q filed with the FCC. She already 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.
Let me now turn it over to Paul for his report Paul.
Thanks, Dan and good morning, everyone. Thank you for joining us today I hope everyone is doing well staying safe and healthy during these challenging times, although the pandemic continues to affect the global economy Siri built on a record fiscal 2019 and first half of fiscal 2022.
Delivered noteworthy growth during the third quarter of 2020, highlighting the resiliency of our company Sea Ray delivered year over year revenue growth for the 19th consecutive quarter as we continue to invest in our portfolio of services during the quarter. We welcome 65 new colleagues.
For a net increase in head count of 11, the half a percent year over year and 3% relative to the second quarter fiscal 2020 at the same time, we saw utilization improved to 69% from 66% in the second quarter of fiscal 2020 in the fourth quarter.
It's called 2020, we expect to see a net increase in head count of less than 3% relative to Q3 drew.
During the third quarter, we saw growth across both our legal and regulatory and management consulting services I would like to spend a few minutes exploring each component more deeply within legal and regulatory our antitrust and competition economics practice grew more than 20% sequentially.
M&A markets rebounded from the extreme lows observed during the second quarter.
This brought the practice to more than 90% of the revenue obtained in Q3 Oh.
Excuse me more than 97% of the revenue obtained in Q3 of fiscal 2019, its largest quarter ever transactions across a broad range of industries, including retail health care and technology are drawing on theories expertise and merger review and analysis. In addition.
Practice continued to support clients on a wide variety of litigation matters [laughter].
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Our experts are providing testimony in cases, covering allegations are price fixing attempted monopolization and other potentially anti competitive behaviors in the consumer goods food and beverage and technology industries among others Sea Ray experts are also involved in several ongoing dispute.
It's at the intersection of anti Trust and intellectual property looking more broadly at the legal market in the third quarter total case filings were down 16% year over year focusing on types of litigation matters that are more closely aligned with sea Ray services, we saw case filings decline.
By roughly 13%, although the rate of change vary greatly depending on play for example securities case filings in the third quarter increased 5% year over year, while antitrust filings declined 18%.
In the courtroom the number of court judgments during the third quarter were down approximately 35% relative to the third quarter of 2019. This suggests that courtrooms continued to be impacted in their ability to handle normal litigation case loads.
Despite these less than ideal condition, our finance forensic services and risk investigations and analytics practices, all delivered double digit revenue growth year over year within our finance practice theory continues to work on matters arising from the government's investigation.
Prosecution of institutions and individuals for alleged spoofing and manipulation in the financial markets. In addition, we continue to work on Securities Litigation International Arbitration and merger related litigations, including appraisal actions. Our forensic services practice continues to experience strong does.
Man from companies that need help responding to allegations of fraud cyber crime misconduct and noncompliance. These issues had been exasperated by COVID-19 as employees have transitioned to remote working environments and certain industries face unprecedented financial stresses and operational challenge.
Just for which their internal control environment may not have fully adapted during the third quarter. The practice was retained to investigate allegations of overcharges for parts and inappropriate allocations of costs involved in a 30 year joint venture covering all of north central and South.
America with over one of the have a billion dollars in claims and counterclaims our team will be providing expert witness testimony next year in the IC see international court of arbitration in Paris, France.
The practice also continues to conduct hundreds of cyber incident response matters each quarter across a broad range of industries and geographies for example, during the quarter on behalf of a global insurance broker the forensic services practice leverage his deep cyber incident response and E discovery competencies.
To help the client respond to a ransomware attack.
During the third quarter see arrays risk investigations and analytics practice investigated possible violations of the foreign corrupt product practices that by U.S. government supplier in multiple foreign jurisdiction. The team also issued an expert report examining allegations money laundering over a 10 year period.
And a large global financial institution based in the U.
They also completed an investigation for the board of directors of a large.
National non profit organization into alleged racial and gender discrimination next.
Next I'd like to turn to our management consulting services, while our life Sciences practice enjoyed single digit year over year growth I want to highlight our energy practice, which in August welcome 15, New London based colleagues dirt.
During the third quarter. The practice continued to work on a large engagement to help a UK based utility transform and modernize its business. We also continued work on a long running engagement assisting the federal Republic of Germany, and an international arbitration dispute related to the cost of a nuclear.
<unk> power plant shutdown.
Congratulations to my colleagues for delivering another strong quarter.
Through the first three quarters of fiscal 2020 on a constant currency basis relative to fiscal 2019, we have increased revenue by 11.8% to 371.1 million and non-GAAP EBITDA by 12.2% to 36.8 million achieving a march.
One of 9.9% given the strength of our year to date performance and the growing momentum across our service portfolio. We are reinstating financial guidance for the full year fiscal 2020 on a constant currency basis relative to fiscal 2019, we expect revenue.
In the range of 498 million to 504 million and non-GAAP EBITDA margin in the range of 9.7% to 10.2% with that I'll turn the call over to Chad and then Dan for a few additional comments Chad.
Thanks, Paul I want to provide a few comments about our capital deployment during the quarter.
As Paul described against a challenging economic backdrop Sea Ray again generated strong cash flows for the trailing 12 months ended the third quarter of fiscal 2020.
These adjusted net cash provided by operating activities was $77.3 million or 15.8% of trailing 12 months revenue. Our adjusted net cash provided by operating operating activities was 33% higher than a year ago, driven primarily by the growth.
In our business and reduced overhead spending as a reminder, this metric begins with net cash provided by operating activities from our statement of cash flows and adds back net forgivable loan issuances, which are predominantly used for talent acquisition and talent maintenance.
Adjusted net cash provided by operating activities represents a discretionary pool of capital used to fund items, such as talent acquisitions office expansions debt repayment and read distributions to shareholders.
During the third quarter fiscal 2020, we spent approximately $2.2 million on capital expenditures as we wrapped up our office build outs in New York, Toronto and Zurich.
The fourth quarter of fiscal 2020, we expect to spend less than $2 million on total capital expenditures.
As Dan will describe in greater detail during the quarter, we repaid 21 million.
Our borrowings under our revolving line of credit, while our cash balance increased by $5.3 million.
We also returned $6.8 million of capital to our shareholders consisting of $1.8 million of dividend payments and $5 million for share repurchases of approximately 110000 shares finally.
Finally, reflecting our commitment to returning capital to shareholders, we announced earlier today, a 13% increase in our quarterly cash dividend from 23 cents to 26 cents per common share. This dividend will be payable on December 11th 2020 to shareholders of record as of November 24.
2020, and now 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 web site under prepared CFO remarks, before we get to questions. Let me provide a few additional metrics related to our performance in the third quarter fiscal 2020.
Arms of consultant headcount, we ended the quarter at 826.
Instead of 140 officers 473, other senior staff and 213 Junior staff. This represents a 3% increase compared with the 802 consultant headcount reported at the end of the second quarter of fiscal 2020.
Non-GAAP selling general and administrative expenses, excluding a 3% attributable to commissions to Nonemployee experts was 15.2% of revenue for the third quarter of fiscal 2020 compared to 16.8% a year ago.
This quarter's ratio was positively impacted by the strong revenue for Q3 and effective management of our overhead. Additionally, travel and entertainment expenses were significantly lower year over year, primarily due to ongoing travel restrictions in various jurisdictions and work from home policies.
We will continue to monitor our discretionary expenses to properly manage risk and proactively mitigate the financial impacts from COVID-19.
The effective tax rate for the third quarter of fiscal 2020 on a non-GAAP basis was 28% compared with 18.2% on a non-GAAP basis for the third quarter of fiscal 2019.
As a reminder, the tax rate in the prior year quarter included the release of certain tax reserves, which reduced the overall rate turning.
Turning to the balance sheet DS so at the end of the third quarter was 113 days.
Compared with 107 days at the end of the second quarter of fiscal 2020.
Yes, so in the third quarter consisted of 75 days of billed and 38 days of Unbilled of note. Our pace of collections has been consistent both before and after most of the world transitioned to a remote work environment.
The company's liquidity remains strong totaling approximately $111 million when taking into account our available capacity on our revolver.
All bank line of credit and our cash balance.
More closely at the components during the third quarter, we paid down $21 million on our revolving line of credit to bring the outstanding balance down from 59 million at the end of fiscal Q2, 2000 $20 million to $38 million at the end of Q3, we have since paid down an additional $8 million to bring the current outstanding balance to 30 million.
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We concluded the third quarter of fiscal 2020 with $24.1 million in cash and cash equivalents with the majority presiding internationally.
That concludes our prepared remarks, Rob we would now like to open the call for questions.
Thank you.
At this time well be conducting a question and answer session.
If you want to ask a question. Please press star one from your telephone keypad and confirmation telephone indicate your line is in the question queue.
You May press star to feel like to move your question from the Q.
Participants using speaker equipment, maybe they're starting to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Thank you and our first question is from the line of Andrew Nicholas with William Blair. Please proceed with your question.
Hi, good morning, and its actually Trevor Romeo in for Andrew. Thank you for taking our questions here.
First of all guidance seems to imply some sequential growth in the fourth quarter, you mentioned, some nice sequential trends and the antitrust its own shop.
Very good last quarter and the performance for you know many of the other businesses has been strong throughout the year I'm. Just wondering if you could kind of discuss where you expect to pick up to come from and how you expect those dynamics between those two cents the business to play out in the fourth quarter.
Hey, good morning, and thanks for the question Yeah, I believe the guidance does imply sequential growth that also implies year over year growth.
From a record 2019 levels as.
As we have been demonstrating quarter after quarter Oh, we have all parts of the portfolio are contributing a this quarter, we had both lines of business.
Showing nice growth and expansion, we had both geographies both here in North America and in Europe.
And probably the biggest pleasant surprise, even though they didn't experience year over year growth was our antitrust and competition economics practice.
Oh really seeing activity pickup both occurred across the merger and acquisition World and also across the antitrust litigation matters.
All signs are given the level of business activity, we see coming through the door.
That said, we are really looking for that balanced contribution to continue through the fourth quarter.
Okay, Great. That's a that's good to hear and then I was also just wondering if you could talk a little bit further about the court system dynamics over the past few months I'm. Paul I think you had mentioned that quarter, you know still not able to handle the normal caseload is that largely just because most of them are still physically close.
Or they haven't implemented virtual proceedings, you know as well as maybe they could have and you know, especially with higher Colgate cases lately across most of the country or is there a risk of litigation related work slowing further if a if that continues to get worse.
Yeah, you know a let me start by saying I don't know any of these things directly I don't have any information coming from many of our various courts systems. It's just what we're observing in terms of the statistics and what we're reading here, but.
But I think the answer is yes to all the impede meant that you listed are all impacting both the courts ability and the various clients ability to proceed.
And the various.
Well jurisdictions here and because of the surge in cases, or we are not necessarily optimistic or that the flow of matters through the courts will change significantly in the coming quarter.
Okay got it that's helpful. Thank you very much thank you.
Our next question comes from the line of Marc Riddick with Sidoti and company. Please proceed with your question.
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Hi, good morning.
Good morning, Mark.
When they took over a couple of things a it's certainly a a lots of a positive moving parts I wanted to talk a little bit about the I first of all the headcount additions.
Additions, which you are forecasting there it seemed as though during the third quarter, we primarily junior already expecting that to be similar mix in the fourth quarter, a similar seasonal mix or are we looking at I know there's been some announcements of some senior additions as well. So I was wondering you can sort of talk about what that that mix might look like as far as of yet.
Filled the majority of the ads are on the junior staff Franks, just because of better staffing pyramid here.
We had a deferred the start dates of our junior class ranks into towards the end of Q3 and into the beginning of Q4. So we can best integrate our new colleagues and this virtual world of but we did have some new senior colleagues both off from University hires the joint.
Does during the third quarter.
And now into the fourth quarter and also a nice mix of junior and senior colleagues from our group hire that we did in the UK or the one I reference with the energy practice.
Okay, and then I wanted to also a sort of shifting gears into the <unk> the answer trust and the strength of M&A that we've seen certainly relative to the first half of the year or was it was certainly a a clear positive and I was wondering if you could talk a little bit about what that does to the.
The fourth quarter visibility and maybe how that played into the decision to a suitable to reinstate guidance there.
I think it's a it's significant info.
Influence to our reinstating guidance or our antitrust and competition economics practice Uh huh.
It's really the foundational practice subsea array makes up about 40% of the firm and there's always a top performer says we see their activity pick up and it's a nice balance of activity as I mentioned to be across mergers and antitrust litigation.
That gives us a foundation to feel more comfortable.
Oh, well with providing guidance and as Romeo mentioned earlier, both that implies sequential and year over year growth.
Okay, Great and then you made mentioned as to that that broad base across a lot of different service industries. I was wondering you could talk a little bit about maybe if you're seeing a similar broad base mix of industry participation and the forensics practice and maybe what they are.
We're experiencing certainly it's understandable once it was increased fraud and cyber crimes and all of US working from home, but I Wonder if you could touch a little bit on and if there are any particular groups that are seeing a little bit more or less than other other service areas.
Clearly the cyber work has taking a sharp increase in demand during 2020.
Just because of the environment that you know corporate America.
Really global economy is facing right now, but we've also blunt been very pleasantly surprised that the demand for their forensic investigation work continues throughout 2020 or so there's demand for what I would call independent investigation from.
Cyber there's litigation and you know damage estimates associated with some of these cyber instead of response work.
So you know you don't grow as rapidly as that practice has been growing by not have by having solely one contributor for grow so we're seeing that demand across all the components of their services.
And the last area I sort of wanted to touch on them and you alluded to some of this earlier around lower capital spending.
During the quarter and certainly assuming overall was a pretty much flat year over year. Despite revenue growth. So I was wondering if you could talk a little bit given the the second wave activity that we're seeing out. There is there is there any sort of visibility that you're looking at as far as spending expectations going into the fall.
At quarter end, and maybe is that part of a contributing factor for the for the for the four expected margin strength going forward. Thanks sure all of our offices are ready and able to receive our colleagues, but we are encouraging our colleagues to work where they feel most.
Comparable given all the dynamics.
And our various communities or the vast majority of my colleagues are choosing to work from home, which we totally support ER and for that matter. Our clients are also taking this route thus.
We haven't seen any kind of business travel we haven't seen any kinda traveled for marketing purposes.
And we expect that to continue.
Into the fourth quarter. So that was also a contributing factor in us being able to provide guidance on on the EBITDA margin range to Mark.
Okay, great. Thank you very much thank you.
Our next question is from the line of Kevin Steinke with Barrington Research. Please proceed with your question.
Good morning, <unk>, so in light of.
Usually the the antitrust suit that was filed against Google I I'm just wondering in a case like that you know not only specific to that particular case, but how much can that lead to follow on work in the market in terms of.
No other private party suits et cetra cropping up you know may be claiming harm I'm, just trying to get a sense as to the type of tailwind that a case of Ah that magnitude magnitude could provide across the broader market.
It's really difficult to tell for a number of reasons. One a we don't know what the findings will be a nice kinda suits when government entities are doing investigations into these large technology companies.
So the findings in the suit a we'll have a huge impact on the type of follow on litigations if any.
Our associated with that investigation of the other part is sometimes these investigations are resolved very rapidly sometimes it may take a few years.
And all of that is still unknown at.
At this time, although I cant reference our retention on the specific matters. They can't stay that's you know see arrays involved in one capacity or another and several of these you know landmark Ah matters.
Okay.
Fair enough.
You know with with you continuing to add a new consultants.
In this environment.
To drive longer term growth I'm, just just one curious about the cultural aspects to that how you're handling that with you know most people continuing to work from home and.
You know how you think about integrating your new colleagues in this environment.
Yeah, you know were professional services firm or our asset our people I don't have to go any further than that.
We have built something very special let's see already I think outperformance over several years now demonstrates that well we built this special and not just the members a corporate but all of my colleagues are working really hard to preserve that asset during these volatile economic times.
Because we think the asset is worth preserving a we think that it will maximize the value of our company in the long run by doing that it takes a lot of work because as you see the profitability levels or the utilization levels are what weve been accustomed to.
Over the last few years, but we're making.
Not to sound corny, we're making ends meet by finding other sources of cost savings.
To offset the higher capacity costs integrating people into virtual world is difficult you can do all the training that we've done in years past virtually but it's hard to really get people acclimated into an organization into the culture. When all you're doing is on phone calls on zoom calls.
You know 24, seven so we're doing our best it is not optimal but I really have to commend all of my colleagues both on the corporate side of the House then on the consulting side of the house for making our new colleagues feel welcome a good first steps, but a lot of work still to do on that.
And.
Okay No that's.
That's helpful and you referenced a in your press release.
Growing momentum in the business obviously, we.
Talked a quite a bit about and I trust and M&A activity this morning, but.
I don't know if there's any other areas you'd want to highlight where you're seeing momentum or is it kind of broadly across the.
The portfolio.
One I believe the momentum is broadly across the portfolio clearly we have seen a step up in activity with our antitrust and competition economics practice. During Q2, we cited that the number of new projects coming into CRM contracted year over year.
During Q3, although it was low single digits, we saw an expansion of new cases coming in to the firm. So we take that as a positive and we're working hard to try to continue on that trend.
Okay, Great and then just lastly.
Maybe just update us on capital allocation I guess, it's his continues with your your kind of your normal strategy, but maybe just talk a little bit more about the dividend increase and.
Your share repurchase activity.
In the quarter and Uh huh.
Capital going forward.
Yeah, our long term capital allocation strategy hasn't changed this company I think is well run and produces very attractive cash flows we have always been able with those cash flows to reinvest in the business for value, creating growth and give money back to shareholders.
You know we believe our stock is very attractively priced, but we're trying to be prudent with the allocation of our capital in terms of redistribution do share repurchases just because of the uncertainty.
In the marketplace right now and the demand environment I do not want to start by any means or our ability to grow our services going forward.
Okay, great well congratulations on the nice results on its own. Thank you Kevin. Thank you I appreciate it.
Thank you Weve reached the end of the question and answer session I will now turn the call over to Paul mainly for closing remarks.
Again, thanks to everyone for joining us today are things for our analysts for listening and asking some good questions. We appreciate your time and interest in theory would 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 fourth quarter call be safe, everyone with that that concludes today's call. Thank you.
Thank you Mr. Bailey you.
You mean, everyone may now disconnect your lines at this time. This concludes today's call. We thank you for your participation.