Q1 2022 CRA International Inc Earnings Call
[music].
Okay.
[music].
Okay.
[music].
Good day, everyone and welcome to Charles River Associates first quarter 2022 conference call.
Please note that today's call's 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 CRA I Dot com.
With us today are Cra's, President and Chief Executive Officer, Paul 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, 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.
I will now turn it over to Paul for his report Paul.
Dan and good morning, everyone. Thank you for joining us today.
During the first quarter CRA continued to build momentum in the business and demand for our services revenue increased to $148 $4 million, which represents the highest quarterly revenue in the company's history. Our performance was broad based with five practices and I Trust in <unk>.
Competition economics.
Actions in competitive bidding intellectual property labor and employment.
And risk investigations and analytics delivering double digit revenue growth year over year.
CRA continues to expand its margins as profits grew faster than revenue specifically non-GAAP net income increased 7% earnings per diluted share increased 12% and EBITDA grew 6% year over year.
I would now like to spend a few minutes highlighting some of the services we provided during the first quarter.
Despite a 21% decrease year over year worldwide M&A transactions totaled one trillion dollars during the first quarter of 2022, marking the seventh consecutive quarter of one trillion dollars or more against this backdrop, our antitrust and competition economics practice.
Record at its highest quarterly revenue ever during the first quarter. The practice continued to support clients in merger review proceedings and jurisdictions around the World for example, CRA team assisted clients and obtaining unconditional clearance.
Biscuit International's acquisition of Continental bakeries, which strengthened biscuit international's position as a producer of private label Biscuits in Europe . The commission concluded that the proposed transaction would not raise competition concerns given the company's activities are mostly complementary.
And that for those markets, where the company's activities overlap enough alternative suppliers would remain after the transaction.
The commission also assess possible effects stemming from the combined entities uniquely large portfolio of sweet biscuits and concluded that the transaction would give the parties neither the ability nor the incentive to engage in port closing strategies against competitors.
Looking more broadly at the legal market trends and activity levels were mixed total case filings during the first quarter of 2022 were down 6% year over year within the courtroom. The number of total court judgments during the first quarter was up 12%.
Relative to the first quarter of 2021. This reflected continued improvements from the approximately 1% year over year increase observed in Q4 of 2021 consistent with these market conditions Cra's revenue from legal and regulatory offerings grew modestly during the first quarter.
<unk>, 4% year over year.
In addition to their merger review work Cra's antitrust and competition economics practice continued to support clients in the context of legal disputes during the first quarter CRA experts prepared and delivered expert reports and testimony and antitrust investigations addressing price fixing.
<unk> and merger related claims.
Our intellectual property practice advised on multiple high Stakes litigation matters, covering a broad range of industries. For example, in a patent infringement and false advertising litigation involving the fitness industry CRE expert analyzed potential economic damages, including loss prop.
It's reasonable royalties.
An unjust enrichment and a breach of contract matter involving HIV drug research contracts between a government agency and a pharmaceutical company series was retained by the department of Justice to testify on potential harm arising from the alleged breaches and certain contract interpretation.
Issues. The IP practice has also experienced an increase in activity involving U S. International Trade Commission investigation for example, CRA expert analyzed economic issues related to an ITC investigation involving psychological monitoring technology.
Used in smart watches.
Within our labor and employment practice CRA continues to be engaged by clients to provide economic analysis and ongoing employment employment litigation regarding equal employment opportunity and wage and hour matters as well as traditional labour disputes involving collective bargaining and the national labor.
Relations.
Our board for a financial services client, we have developed mediation tools that allow our clients to quickly assess potential exposure associated with alternative off the clock work assumptions.
On February 28, 2022, CRE welcomed approximately 45, new consulting and corporate colleagues to CRA as part of the acquisition of Welch consulting.
One month into the integration of the labor and employment practice has already experienced the benefits of cross selling services within the practice and across CRA with our new colleagues Vice presidents from Welch consulting where retained as testifying experts on projects originating outside the labor and employment practice.
Including a recent opportunity with our forensic practice, we have also been able to incorporate specialized skills found within each group to benefit our clients or example, CRA as legacy labor and employment practice has benefited from Welch data development programs that improve the efficiencies of our.
Analytics and delivery of client services.
These are the types of benefits that attracted us to wealth to the Welsh team and we're pleased to see the integration playing out as expected.
During the first quarter, our multi disciplinary risk investigation, an analytics team of forensic accountants and quantum experts assisted outside counsel and it is significant.
REIT industry arbitration, we began as a matter what began as a matter of excuse me involving read investment in tax accounting issues grew as the team identified additional damage related issues and were able to quickly leverage the depth of cra's expertise incur.
<unk> the risk practices investigative and social media analytic resources computer forensic resources and valuation experts from the finance practice within our management consulting offering the auctions and competitive bidding practice achieved a major milestone with its dairy trade auction platform.
Conducting its 300 trading event in January Cra's G. D. T platform has been used since 2008 by global dairy sellers and buyers to transact more than $30 billion and internationally traded dairy products for its electric utility clients. The practice conducted five.
Auctions are.
In Rfps during Q1 for 25 years, CRA has been designing and managing competitive bidding procurements for energy clients in various jurisdictions meeting their needs and the needs of their customers as well as state and federal regulatory requirements I'm grateful to all of my colleagues for their hard work.
And helping our clients address their most important challenges.
As our first quarter results demonstrate our portfolio of services remains highly valued by our clients. Moreover, we are well positioned to maintain the momentum in the business. During the first quarter. We grew our project lead flow and new project originations by 25% and 16% respect.
<unk> compared to the fourth quarter of 2021.
The quarter's project lead flow and new project originations each represented Cra's second highest achievement ever only eclipsed by the performance observed in the first quarter of 2021.
Yes.
With that I'll turn the call over to Chad and then Dan for additional comments chat.
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 first quarter of fiscal 2020 to Cra's. Adjusted net cash flows from operations were $74 9 million or 13, 2% of revenue it's.
As Dan will describe in greater detail, we concluded the quarter with $43 $7 million of cash and $60 million of borrowing under our revolving credit facility, resulting in a net debt position of $16 $3 million.
The Q1 fiscal 2022 borrowings were primarily to fund bonus payments, which is consistent with our practice in prior years bonuses will be fully paid by the end of Q2, and we expect the associated borrowings to be retired by year end.
In addition to the enormous normal bonus cycle. The first quarter of 2022 also saw cash outlays for talent investments of $19 $4 million, including payments associated with the acquisition of Welch consulting.
We also spent $1 3 million on capital expenditures for fiscal year 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 first quarter, consisting of $2 $4 million of dividend payments and $5 million for share repurchases of approximately 57000 shares we have approximately 45 $5 million.
Available under our current 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 first quarter of fiscal 2022.
In terms of consultant head count we ended the quarter at 878, which consisted of 146 officers 505, other senior staff and 227 Junior staff. This represents a four 9% increase compared with the 837 consultant head count reported at the end of Q1 fiscal 2021.
non-GAAP selling general and administrative expenses, excluding the three 3% attributable to commissions to non employee experts was 14, 4% of revenue for the first quarter of fiscal 2022, compared with 13, 2% a year ago. This quarter's ratio was impacted primarily by an increase in travel and entertainment expenses as <unk>.
Well as higher labor costs.
The effective tax rate for the first quarter of fiscal 2022 on a non-GAAP basis was 26, 4% compared with 24, 5% on a non-GAAP basis for the first quarter of fiscal 2021, the higher rate in the first quarter of 2022. It was largely attributable to a lower benefit arising from the accounting for stock based.
<unk>.
Turning to the balance sheet DSO at the end of the first quarter was 99 days compared with 101 days at the end of the fourth quarter of fiscal 2021 DSO in the first quarter consisted of 59 days of billed and 40 days of Unbilled. We concluded the first quarter of fiscal 2022 with 40 <unk>.
$3 $7 million in cash and a further $110 $6 million.
Of available capacity on our line of credit for total liquidity of $154 $3 million.
That concludes our prepared remarks, we will now open the call for questions. Rob. Please go ahead.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
You May press star two if he 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.
Our first question comes from Andrew Nicholas with William Blair. Please proceed with your question.
Hi, good morning, Thanks for taking my questions.
I wanted to start with with the really strong commentary around the pipeline in new business and new project origination numbers.
Could you maybe speak to any practices in particular that are driving that any any areas where momentum has picked up considerably at least relative to last quarter.
Let me start with good morning, Andrew.
Thanks for the question.
Clearly the practices we highlighted.
As the five practices that experienced double digit revenue growth enjoyed a nice revenue expansion, but also enjoyed a nice lead flow coming into the organization. The other practice that has been slowly building on its pipeline of leads and new project because our life Sciences.
Practice, so we're pretty excited about the momentum of that practice and you know hopefully it continues in the quarters ahead as we see that practice you know expanding on that so those are the main units that I would highlight right now.
As driving some of the expansion clearly the labor practice I'm sorry.
<unk> enjoyed a large expansion with a combination of Welsh consulting, they're bringing on new lead flow. In addition to bringing over existing projects that they were working on prior to the acquisition.
Yes.
Makes sense. Thank you and then for my follow up just wanted to ask about bill rates broadly, obviously with wage pressures across the industry just kind of curious.
If you could speak to your ability to pass along rate increases how much of that is in the numbers to this point just general receptivity from clients to that conversation my my perception or my sense is from.
So speaking to other other companies is that you know rate increases are pretty well understood and in the current environment, but just curious to get your take on that thank you.
Sure.
I'm going to start with you're right in that we have seen some wage pressures.
Particularly with the University of level hires as we said in the past, we believe that we will be largely able to mitigate.
Higher wages that we are incurring.
Throughout our company through.
Either the way, we deliver the services by that I mean, the staffing leverage we may use or by passing.
Those higher wages through higher rates. The catches always that you have to make sure you're delivering value for your clients. It's not simply because your costs are going up the clients will be receptive to higher bill rates.
To date, yes, we have starting on Jan one we have increased our bill rates and it usually takes a couple of months.
Before we fully appreciate the stickiness of that rate increase but through the first four months of the quarter I'm pretty pleased.
With the Receptiveness of our clients are those increases.
Great. Thank you I appreciate the insight thank you Andrew.
Our next question comes from Kevin Spanky with Barrington Research. Please proceed with your question.
Good morning, congratulations on the strong results.
Thanks, Kevin I wanted to.
Sure.
I wanted to.
To start out just.
Without.
Asking about the margin trends and obviously you.
Started out that you're really.
Really nicely here, 12.7% non-GAAP EBITDA margin.
You know maintaining that.
Outlook for the full year, a 10, 8% to 11, 5%. So just wanted to get a sense of.
You know your hiring plans as it relates to you.
Some of the high end talent that you're.
Are you expecting to bring in and how that will affect you.
The expense base as well as just what youre seeing in terms of.
Trends in G&A expenses and pick.
Pickup in travel et cetera.
As things hopefully start to normalize a little bit more post or coming out of the pandemic.
Sure No. We are also very pleased with both the revenue performance and the profitability of the company as a whole.
We're pleased with what we're seeing on the gross margin.
And we're also pleased with what we're seeing on the operating income line.
And with respect to that moving forward. There are a lot of variables that we're trying to take into account.
One of them of course being as a CRA returns to the office and maybe becomes.
More visible physically and four in front of our clients, we may see meals and incidentals increase.
In the coming months and quarters on that I think in aggregate I would not expect.
Much more than a 50 to 100 basis point increase in SG&A as a result.
Of this return to the office and increase of client interaction and you know meetings at various conferences.
So we feel pretty good.
With where we stand now we think we've gained a lot of efficiencies in operations over the past several years that should help us as we re emerge as a firm.
Alright good.
Yes.
I think you know kind of baked in that.
Expectations on the margin at least you discussed this last quarter. It was just that.
You would expect forgivable loan amortization pick up.
In 2022.
By about 50 basis points versus last year, we actually came in.
Down 20 basis points in the first quarter on forgivable loan amortization as a percentage of revenue. So I just wanted to get a sense is again about the.
Pipeline, you know your thoughts on bringing on some higher.
Level people and how that could affect.
Forgivable loan amortization for the rest of the year.
Sure.
We still anticipate forgivable loan amortization in 2022 to be roughly 50 basis points higher.
Then it was during our.
Fiscal 2021.
Reason, we're confident in that statement is.
The pipeline is really rich we have some deals.
That hopefully we can share in terms of senior recruits.
And particularly when youre, bringing on senior recruits those that were bringing on incremental streams of revenue and profits are potential small groups.
There is.
Acquisition type proceeds that take the form of these forgivable loans.
So we expect.
The forgivable loan balance to increase from what you are observing.
But the real exciting part about that is we also expect to be welcoming a number of really impressive colleagues in the months and quarters ahead.
Okay.
Great.
<unk>.
I believe.
Correct me, if I'm wrong, but you were looking to.
I have a return to the office.
Kind of a bit more.
Full sense I think it was April one is that was that still the case or you know.
And maybe just any discussion on return to the office and what you've been seeing.
In terms of people coming back in.
Yes.
A little phrase that we use internally and I think it's so true for CRA and from what I'm reading so true for many other firms.
On March 16th of 2020, we went virtual literally overnight.
From being a predominantly an office consultancy and the phrase is that the return to the office will not be as instantaneous it will be a journey.
And to no one's surprise a return to the office on Monday April 4th.
As a journey.
We're making some positive step forward, but with every step for this a half a step back. So we're trying to balance the transition of all of our colleagues across the various geographies.
Two where they feel comfortable in returning back to the office and then even more important that they feel that there is benefit.
From being back in the office.
Through their interaction with colleagues.
Right Okay great.
Can you just maybe give us any high level thoughts on.
Yes.
They're all competitive environments.
As you you know.
Think about the business hopefully coming out of the pandemic here.
Has there been any meaningful changes or.
What are your thoughts on the overall landscape.
There is still a lot of very reputable.
Competitors out in the marketplace, we haven't seen any large scale consolidation.
To remove a competitor or to create a new competitor.
So in terms of.
Our pursuit of high quality revenue opportunities no I wouldn't say the level of competition has increased or diminished meaningfully.
In the last several months.
With respect to the competition for talent.
When your goal is to provide value added services and to be a premier provider of those services.
Our colleagues will always be in demand always be in demand by individuals and firms that provide similar services and also in demand by many other industries, who appreciate the insights of information using sophisticated analytic tools.
So.
When people are calling your colleagues trying to recruit them away you're doing something right because that means you are bringing in the best and brightest and it's our job to make CRA an attractive home.
For these individuals to want to stay here, so far we're pretty happy on the trade off that.
That we're seeing.
Okay. Thanks for taking the questions and again congratulations on the results.
Thank you Kevin Thank you.
Our next question comes from Marc Riddick with Sidoti and company. Please proceed with your question.
Hi, good morning, everyone.
Good morning.
So very strong results and certainly.
Always nice to see especially in the beginning of the year. When you usually we think things are going to.
Start off.
And gradually build generally speaking, but I wanted to ask sort of with the commentary around the strength of our new business development I wanted to just sort of talk about maybe how that.
Maybe the pacing of that love to is that something that was sort of gradual through the quarter or were there any fits and starts that could theoretically be tied to any form of big picture macro or global events.
Q1 is always a bit finicky and that the.
The month of January is typically a transition month.
Coming out of the holidays and transitioning into a new fiscal year and fiscal 2020 was no different from what we've experienced in years past.
Quarter started slowly.
And we saw momentum start to build in both.
The work, we're doing on billable projects and also the lead flow coming in so I would say that that momentum built.
As we went through the quarter and we clearly got a boost by welcoming our wonderful new colleagues from Welch consulting.
Towards the end of February .
Well that actually.
Nicely. It takes me into my next question, because I sort of wanted to see if we can sort of spend a little a little more time granted it's only been it was only a month as far as the first quarter, but certainly things have gotten off to a very good start there I was wondering just started talk about.
Maybe some of the are there any surprises that you've seen so far.
And maybe you sort of talk a little bit about sort of it seems as though the timing of that practice area is particularly.
Seems particularly timely given all of the things going on around the labor and appointment as I was wonder if you could talk a little bit about that.
Typically in the first 30 to 60 days a lot of the effort.
Is what I would call more administrative efforts on integration.
And my.
My sympathy to our new colleagues and that when you are a new colleague trying to move your teams over trying to move your projects over.
You are inundated with a lot of administration on that transition and they've handled it wonderfully.
I realize.
It's hard to do your day job and providing your clients with exceptional service win. In addition, you're also getting inundated.
With a lot of these administrative.
Requests, but so far so good hopefully as we go forward everyone's focus can be on providing higher value services to our clients and thats really what we wanted to try to highlight today and some of the speaking notes is talking about how we are seeing benefits.
From the combination of these two entities and I'm, hoping as we learn more about them and they learn more about us.
Those benefits start to multiply.
Great and then I wanted to switch gears over to the commentary we've talked in the past about it and it's always appreciate it.
And you mentioned sort of what you're seeing going through the courts and what those pieces look like I was wondering if you could talk a little bit about maybe.
The feedback has been like with your.
With the law firms and maybe is there sort of a general sense as to what their needs may be or how they may have evolved.
So far this year, given what we're seeing in the courts or maybe type of feedback that you're getting from them as to what we might see going forward.
I think the feedback has been pretty consistent we haven't necessarily seen an about face from our clients in terms of the types of services. They are asking in Q1.
Theres always the starts and stops unfortunately that we've had to deal with because of the health related concerns.
And while we experienced starting in December .
Through January with the Omicron Serge.
And quite frankly as.
The World has tried to reemerge in the months.
March and April we're seeing surges again across our various geographies.
Those starts and stops do impact.
The flow of revenue and the flow of lead opportunities. So I think everyone.
Would love to have some normalcy.
Defined anyway, you want with that but it's more of the starts and stops I think are what is problematic.
I haven't seen.
Yet what I would call a noticeable impact on the demand related to a lot of the political.
Turmoil that we're seeing around our world.
Okay, and then last one for me.
Mentioning as far as the strengthen in antitrust and it's certainly notable especially with the.
The challenging comparison of global M&A activity is wondering if you could spend a little time, but are you getting a sense of.
A kind of gaining market share as far as what you're seeing there. But also is there is there any kind of difference as to maybe what the scope of those assignments are do you get the sense of are they maybe larger or are they lasting longer than the.
Normal and maybe what that mix might look like maybe compared to a year ago or so thanks.
Sure.
The point, we were trying to raise with the quoting of the M&A activity is yes, there was a sequential decline.
Sure.
There was a decline in aggregate M&A activity by I think I said, 21%.
But what we don't want to lose sight on that we've been in roughly almost a two year stretch of time with in which M&A markets are running at unprecedented levels.
So yes, it is a 21% decline, but for seven consecutive quarters of over a trillion dollars, it's still a pretty lucrative market.
For that and my colleagues have done amazingly well.
On getting their fair share of those matters.
It's always hard to gauge what exactly is your market share and the legal regulatory environment because of how fragmented some areas of the marketplace may be.
But I think if you look now over an extended period of time.
I'm pretty comfortable in saying CRA has gained market share.
Over the last several years from who and exactly what area, that's a little harder.
To gauge.
Thank you very much.
Thank you.
At this time, we've reached the end of the question and answer session. I will now turn the conference back over to Mr. Mali for any closing or additional remarks.
Again, thanks to everyone for joining us today, we appreciate your time and interest in CRA.
Going to be busy participating in virtual meetings with investors in the coming months and we look forward to updating you on our progress on our second quarter call with that that concludes today's call be safe everyone.
This concludes today's teleconference. You may disconnect your lines at this time and we thank you for your participation.