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CRA International (NASDAQ:CRAI)

Q4 2013 Earnings Call

February 13, 2014 9:00 am ET

Executives

Wayne D. Mackie - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Paul A. Maleh - Chief Executive Officer, President, Director and Member of Executive Committee

Analysts

David Gold - Sidoti & Company, LLC

Jeffrey Rossetti - Janney Montgomery Scott LLC, Research Division

Timothy McHugh - William Blair & Company L.L.C., Research Division

Operator

Good morning, and welcome to Charles River Associates' Fourth Quarter Fiscal Year 2013 Conference Call. Today's call is being recorded. 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. At this time, for opening remarks and introductions, I'd like to turn the call over to Mr. Mackie. Please go ahead, sir.

Wayne D. Mackie

Thank you, Latoniya. Statements made during this conference call concerning the future business, operating results, tax rates and financial condition of the company and statements using the terms believes, expects, should, prospects, goals, encouraged, optimism, opportunities, momentum, will continue, positions for continued growth, seek 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 the 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 SEC 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, as well as adjusted EBITDA. I would encourage everyone to refer to today's earnings release for a full reconciliation of these non-GAAP items to their GAAP equivalents, as well as the calculation of adjusted EBITDA based on GAAP and non-GAAP results.

Let me now turn it over to Paul Maleh for his report. Paul?

Paul A. Maleh

Thanks, Wayne, and good morning, everyone. CRA ended fiscal 2013 strong with non-GAAP year-over-year revenue growth of 12.6% in the fourth quarter. In addition, on a fiscal year basis, non-GAAP revenue grew 3.2% in fiscal 2013 as compared to fiscal 2012. Throughout the past year, we emphasized the quality of our existing portfolio and the confidence we had in its ability to deliver strong results. Our second half performance bring this point to bear as many areas across our portfolio and internal operations clicked and delivered solid results. A few highlights demonstrate the strength of our performance.

Company-wide utilization during the fourth quarter was 80%, as compared to 78% in the third quarter of fiscal 2013. For the entire year, company-wide utilization was 73% as compared to 68% in fiscal 2012. Q4 revenue grew on a year-over-year basis in both our North American and European geographies. 6 practices in particular delivered exceptionally strong Q4 year-over-year revenue growth: Antitrust & Competition Economics, Auctions & Competitive Bidding, Financial Economics, Intellectual Property, Life Sciences and Transfer Pricing.

Non-GAAP adjusted EBITDA margin was 16% in Q4 and 15.4% for the fiscal 2013, our highest full year result since 2007. Q4 cash flow from operations was $35.6 million, a substantial increase from Q3, driven in part by our 20-day improvement in DSOs to 94 days. We concluded fiscal 2013 in a strong cash position with $51.3 million on the balance sheet.

Turning to our top line performance in more detail. Our Litigation and Regulatory revenue grew by 13.2% year-over-year in the fourth quarter and by 8.6% for the full year compared to fiscal 2012 on a non-GAAP basis. Our Antitrust & Competition Economics factors has consistently delivered outstanding results for CRA and it achieved growth in both North America and Europe during fiscal 2013.

In North America, for example, the practice advised on 2 high-profile M&A cases that were settled during the quarter, including the US Airways, American Airlines matter and the Office Depot and the OfficeMax mergers. In Europe, we advised on a range of Antitrust and Competition matters including a joint venture in the chemical sector. With Finance and Antitrust & Competition Economics practices continued to work together to assist financial institutions that are being investigated by global competition authorities and financial market regulators for trading activities in markets for commodities, interest rates and credit products.

Another highlights from our Litigation/Regulatory business. During the fourth quarter, our Intellectual Property practice advised large multinationals in a range of industries. This included the analysis of the economic damages due to patent and trademark infringement, as well as valuations of IP assets such as copyright, and trademarks, and transactional and corporate restructuring purposes. Despite Management Consulting revenue declining by 15.8% for the full year fiscal 2013, Q4 revenue increased approximately 10.4% on a year-over-year basis.

Fourth quarter sequential growth was driven by our Life Sciences practice, which advised on many of the major issues being faced by drug companies and others in the pharmaceutical industry from reverse payment litigation involving generics to future drivers of decisions around payer coverage.

In addition, Marakon continued to improve its performance during the fourth quarter. The team advised clients in its core sectors of Chemicals, Oil & Gas, financial services and consumer products on such matters as product strategy, portfolio assessment, wealth in core in adjacent markets and pricing. Our consultants have focused on leveraging series brands and portfolio of talented consultants to broaden client relationships and generate new business for CRA.

Despite general sluggishness in the legal industry and M&A forecast, as well as a general business environment, we are pleased with the level of lead flow activity and the conversion rate into revenue-generating projects. I should note that the colleagues whom we welcomed during the year continued to meet our expectations. I could not be happier with their contributions to the fabric of the organization and their strong financial performance. We will continue to seek opportunities to add leading individuals and groups of consulting talent to further strengthen our portfolio and drive growth in revenue, profitability and cash flow.

Looking ahead, we are encouraged by the trends we've seen in the second half of 2013, which gives us confidence as we enter fiscal 2014. While we remain cautious about our client-spending patterns, the broad-based demand for our services and the solid foundation we have put in place gives us optimism that the momentum experienced during the past 6 months will continue into fiscal 2014 and that our portfolio is positioned for continued growth. I want to thank our consultants and our administrative colleagues for their efforts, teaming and contributions.

With that, I will turn the call back over to Wayne.

Wayne D. Mackie

Thanks, Paul. As a reminder, a more detailed report of my remarks on the financial results can be found in the Investor Relations section of our website. Right now, I will cover a few key metrics.

In terms of headcount, we ended the fiscal fourth quarter with 442 consulting staff, which consisted of 327 senior staff and 115 junior staff. This is a net increase of 14 consultants from the 456 we reported at the end of Q3 of fiscal 2013. As Paul mentioned, our company-wide utilization reached 80% for Q4 of fiscal 2013 compared with 68% in Q4 of fiscal 2012 and 78% in Q3 of fiscal 2013. For the full year, company-wide utilization increased to 73% in fiscal 2013 versus 68% in fiscal 2012. Looking ahead, we anticipate modest organic headcount growth in fiscal 2014. As the quality of our portfolio continues to improve, our goal in fiscal 2014 is to improve upon the 73% utilization we achieved in fiscal 2013.

On a non-GAAP basis, our international revenue contribution for the fourth quarter was 24%, slightly lower than the 26% we recorded in Q4 of last year, and up from the 19% we recorded in Q3 of fiscal 2013. The sequential increase of CRA's international contribution further enhanced our profitability and helped to lower our Q4 overall tax rate to 27.9% on a non-GAAP basis versus 35.9% for the full fiscal year 2013 year. As we continue to benefit from profitable international operations, we believe our non-GAAP tax rate should be in the high-30% range in fiscal 2014.

Q4 fiscal 2013 non-GAAP gross margin was 31%, down from 34% in Q4 of fiscal 2012. Although the percentage of cash compensation to our consultants did not vary, our increased use of the giveable loans to attract consultants account for approximately 2.9 percentage points of the decline, offset by a reduction in stock compensation of 0.4 percentage points. In addition, our reimbursable expenses as a percentage of revenue increased by approximately 1.2 percentage points.

For the fourth quarter of fiscal 2013, adjusted EBITDA based on non-GAAP results was $11.9 million or 16.0 percentage of revenue, compared to $10.8 million or 16.3% of revenue for Q4 of fiscal 2012. For fiscal 2013, non-GAAP adjusted EBITDA increased by 1.6 percentage points to 15.4% compared to 13.8% in fiscal 2012.

Q4 non-GAAP SG&A expenses after adjusting for commissions to nonemployee experts of $2.2 million in Q4 of 2013 and $1.7 million in Q4 2012, decreased to 18.6% of revenue compared to 19.3% of revenue in the fourth quarter of 2012. For fiscal 2013, non-GAAP SG&A expenses, after adjusting for commissions to nonemployee experts, decreased to 19% compared to 21.1% in fiscal 2012.

Turning to the balance sheet. As Paul mentioned, our improvement in DSO was clearly one of the highlights of the quarter at 94 days, down from 114 days reported in Q3. DSO in Q4 of fiscal 2013 consisted of 65 days of billed and 29 days of unbilled, compared to 77 days of billed and 37 days of unbilled in Q3 of fiscal 2013. Going forward, we are driving to keep DSO under 100 days.

In terms of our cash position, we concluded fiscal 2013 with approximately $51.3 million in cash and cash equivalents, and aligned with the approximate $55 million that we had at the end of fiscal 2012. Our year-end cash position was achieved principally by the improvement in our cash flow from operations due to excellent collections and working capital management.

During the fourth quarter, we repurchased about 85,000 shares of our common stock for approximately $1.6 million. As announced today, our Board of Directors has expanded our stock repurchase program by authorizing $15 million for share repurchase -- repurchases, in addition to the approximately $1.4 million remaining under our existing share repurchase program.

Our Board of Directors has also authorized management to enter in to a Rule 10b5-1 plan on behalf of CRA. CRA expects the plan, once effective, will be in place through the end of fiscal 2014. The plan will allow CRA to repurchase its shares at times when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed blackout periods.

On a final note, our credit line remains unused during the quarter. Unused line of -- the unused line of credit and strong cash position give us the financial flexibility to deploy capital and execute our growth strategy.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from David Gold with Sidoti & Company.

David Gold - Sidoti & Company, LLC

Can you speak a little bit more on -- thoughts on, say, sustainability on the utilization side? I mean, the gains that you made in the second half year-to-year are extremely impressive. I guess the question there is do we think at 80% level, which is a high -- certainly in my recent memory, is sustainable for any period, or were there any sort of onetime or large projects factors that played into that?

Paul A. Maleh

Well, let me begin by saying that we're really happy with the utilization that we had both in Q3 and in Q4. We don't believe that type of utilization run rate is steady-state for the organization because there are costs to running at the higher rate, namely that sometimes you just forego revenue, or attempted expansion of your position in the marketplace. The great news about the last 6 months is that the improvements in utilization has not been driven by 1 large project or 1 practice dominating our performance. We continue to stress that the improvement was broad-based and we found almost every single consultant in every single practice contributing to that upward trajectory. So we ended the year at 73%. We're going to strive to try to improve on that in fiscal 2014, although I will always welcome an 80% run rate. That is not our target.

David Gold - Sidoti & Company, LLC

Got you. So would it be safe though than to expect -- if we look back at 2013, basically it was a bit of a stair step where the first step obviously a bit lower, second half much higher. Would you expect 2014 to be a more, let's say, level year on the utilization side?

Paul A. Maleh

We sure going to try awfully hard to make it a level year. It's a lot more fun to work at this company when you have more consistency in performance. The fact is, throughout the first 2 quarters we never lost confidence in the quality of the assets we had. We thought the 67% utilization marks being registered were not representative of the lease we were seeing and not representative of the quality of consultants that we had. So we knew improvement was coming. Did we believe it was going to be as dramatic as we experienced? Probably not. So that's something that we're working hard to deliver for our investors as a more consistency and performance. But I think, secondly, as we feel good about just improving on the overall average of fiscal 2013 going forward.

David Gold - Sidoti & Company, LLC

Got you. Okay. I mean also if you're looking to utilization taking that sort of hand-in-hand with the hiring plans such that we think become that was modest organic headcount growth in 2014. What's keeping you from taking the more aggressive stance on hiring? Is it just -- is it, at this moment, it's optimism but you rather sort of wait and see, or is it a function of not being able to find as many professionals around to hire?

Paul A. Maleh

Our goal is to grow. And year-over-year growth that we experienced from '12 to '13 is not adequate. Our goal is to grow at a figure north of that level. Any growth were to be profitable and sustainable has to be a mix of both organic pursuits and inorganic pursuits. So you will see us hiring organically in term of spill out some high-performing practice areas. And inorganically, we're not going to chase revenue, right. Some of the lessons learned, optimal successes that we've had over the past couple of years in hiring is we're going to hire quality, and we're going to hire quality that improves the depth of that portfolio and helps out practices be successful in the marketplace. And that's always challenging. That's always challenging to find people that are going to improve on the average quality of this organization. But we have lots of prospects we're pursuing, and we think we can be successful in those pursuits in 2014.

David Gold - Sidoti & Company, LLC

Perfect. And then just one last. Wayne, I didn't catch the headcount number for quarter end if you gave it? And -- sorry...

Wayne D. Mackie

Let me put back to it. David, it's the headcount growth at the end of -- was it the number, David, you're asking for?

David Gold - Sidoti & Company, LLC

Right.

Wayne D. Mackie

Yes. At the end of the year, it's 442 consultants.

David Gold - Sidoti & Company, LLC

Okay. Got it. And then part 2, what did we do differently on the DSO side in the fourth quarter?

Wayne D. Mackie

What frankly happened is that we all looked at that 114 days that we ended up Q3 at. Everybody agreed it was unacceptable, and there was a large effort across the company on the part of not just of the administrative staff but the consulting staff to get the bills out, and frankly as needed to work with the clients on getting some of the most significant payments are made. And it culminated in the 94 days that you saw, so it's the old story though, it's first intend to do it again. It's every week, every month, we have to continue that up to keep that DSO in a very, very favorable cash collections at those levels.

Paul A. Maleh

I mean not to sound like a broken record here, but we talked a lot about the quality of the portfolio. One of the other benefits to having a high-quality portfolio is that our collection efforts are going to actually be very successful when we go out there. The write-off rates for our projects are very low, and it actually improved relative to some past years. So the goal is getting our bills out on a timely manner. And our experience has been, if we do that, our clients pay accordingly and give us this kind of attractive cash flow we had in 2013. So a lot of credit is to the consultants who are leading the way there.

Operator

Our next question comes from Joe Foresi with Janney Capital Markets.

Jeffrey Rossetti - Janney Montgomery Scott LLC, Research Division

This is Jeff Rossetti on for Joe. Paul, I just wanted to follow-up on some of your comments regarding, you had mentioned, there were 2 large M&A cases that you worked on. Was there any kind of a slowdown as you might expect from the work that you did and how much did, say, those contribute to utilization picking up to the level it was at?

Paul A. Maleh

Sure. A large part of the effort, for example, on the American Airline merger case took place during Q3. So the momentum again that you saw during Q4, yes, American Airline matter contributed to it, but it was not an overriding driver of the overall performance of the firm. It's, as I mentioned, I literally saw every practice improved second half over first half from our Litigation/Regulatory practices to our Management Consulting practices. Even our Management Consulting may have declined on a year-over-year basis, then we had really improvement that contributed to the improvements on utilization that we experienced during the second half of 2013. So it was not just 1 case, which gives us a little more confidence that things are clicking. The parts are clicking together. But with that said, we need to still drive our opportunity flow, get leads in the door because backlog is relatively short-lived in the legal regulatory space in our business. So we can't rest on the success as we need to continue to push forward. And I feel good about our chances to continue to improve in 2014 there.

Jeffrey Rossetti - Janney Montgomery Scott LLC, Research Division

Okay. Were there any kind of settlements that might kind of impact on those M&A cases? That might impact you in the beginning of this year or going forward? Just curious. I know I realized that you had strength across the portfolio, just trying to...

Paul A. Maleh

You do want me to say that again. We're pretty happy with the way the year ended, and we're pretty happy with the way the year has started here in 2014. So we're working on that. Again, the focus is on continuing to look in the months ahead to get keep that lead flow coming so we don't see a precipitous drop-off in the REITs. Thus far, we're relatively pleased. Some of the practices that may have seen a little drop-off heading into 2014, I have full confidence that they're going to deliver strong performance as the year progresses. So as we said, cautiously optimistic now. It's all about keeping the lead flow moving to have that consistency.

Jeffrey Rossetti - Janney Montgomery Scott LLC, Research Division

Okay, great. And just maybe a little bit more color, I think, Wayne had mentioned that international had picked up quite a bit sequentially. Just wanted to see if I could get some more backgrounds about what was going on in Europe, from sort of a more detail, if possible.

Wayne D. Mackie

Sure. It did -- Jeff, it did pick up between -- during the year. We ended up in Q4 with 24% of our revenue internationally. And that was a spread both in our competition practice, which has always been quite strong, as well as in our management consulting activities outside the U.S. As you saw, and I mentioned in my comments, it helped nicely the effective tax rate in Q4 and the full year down under 40%, which is what, because of lower statutory rates in Europe versus the United States, the profitability there is a real plus. In addition, we have a significant net operating loss carried forward that we get the benefit of outside of the U.S. so that the profitability that we have outside the U.S. is, in general, shielded from taxation here in the U.S. I think the.

Paul A. Maleh

I mean one of the other things, David, that we're really starting to enjoy some of the full benefits of that, you may recall, we did some restructuring back in 2012. And one of those restructuring was restructuring our lease portfolio in Europe. So the operation is much more efficient with a much lower administrative cost burden. So as we're having revenue being driven by a competition antitrust economics in Europe that's led by Cristina Caffarra, and Marakon led by -- our Europe, led by Niel, both of those people have really driven our results in the past 6 months. And with the progress that we made on the administrative side, you're seeing it really impact our overall tax rate. So that cost structure -- the administrative cost structure, we don't expect to increase in the coming quarters and hopefully our leaders continue to push forward on the revenue side.

Jeffrey Rossetti - Janney Montgomery Scott LLC, Research Division

Okay. And just finally one, if I could. Just, Paul, you were talking about just increased effort to get those, have consultants bill in a more, maybe timely manner. Is there any kind of incentive for them to continue doing that? Just want to see -- just try to figure out how -- if you feel like you're on target to keep the DSO number below 100.

Paul A. Maleh

I saw constant pleading [ph] tends to work, our consultants are professionals, okay. And one of the biggest challenge we have is sometimes when we get really busy, their first priority goes to servicing our clients, and then also trying to generate leads to future work. So what we're trying to do right now is we're trying to have our administrative unit to work in tandem with our consultants to make it easier for them to review the bill, get the bills out on time. And our consultants have responded really positively to that teaming effort. So our goal is, if we can get our bills out in that 30- to 35-day window, and that's the unbilled, I think we should be able to stay below the 100-day mark because history has shown for this portfolio clients will pay in that 60- to 65-day window, so we just need to get those bills out.

Operator

[Operator Instructions] Our next question comes from Tim McHugh with William Blair.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Just wanted to ask on the margins. Given the utilization rates you've seen in the last few quarters, but I guess particularly this quarter. I'm trying to relate that to the margin here. And so the adjusted EBITDA margin of 16%, given everything you've done with G&A, and I guess that utilization rate, can you drive that much higher than that? I guess it's hard to imagine utilization will be even better than we've seen this quarter?

Paul A. Maleh

I think if we can get utilization to be right in that mid-70s range, I think we're going to enjoy full year adjusted EBITDA margins north of 16% for the full year. There are some one-off costs that we incurred during the quarter with that revenue but on a steady-state basis, we get utilization in that mid-70s range, we should be able to enjoy full year adjusted EBITDA rates north of 16%.

Wayne D. Mackie

Yes, Tim, I think the -- what you saw the margin, of course, is -- it is down. And the major explanation on that in the GAAP margins is the giveable loan amortization. But frankly, we think that the giveable loans that we've issued are really a key to how we're driving the business and how we're going to grow the business by attracting some very, very strong talent that can really bring in the kind of revenues that we're looking for. So we think it's the right approach. And as we've said in the last few calls, we are focused, perhaps, more now on the cash flow aspects and the cash flow measures of our business. It's a better indication of what we can do over the next few years.

Paul A. Maleh

I mean, the one thing that shouldn't be lost there to, and we talked a lot about improvements and adjusted EBITDA. And improvements and adjusted EBITDA just doesn't come around because we are issuing more for giveable loans. The base improvement comes because the asset is more profitable. And whether you're talking about the operating income line or the gross margin line, our asset is producing more profits and that's driving the adjusted EBITDA. Adjusted EBITDA we're fond of is because of mix quarter-over-quarter comparisons more comparable. And it's closer to cash and that's ultimately what we're driving to do is produce cash in our operations.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay. And then you mentioned in organic growth is something you focused on, I guess, what -- how are you approaching that? What types of businesses would you be looking at? Is it geographic expansion? Are we looking at new service lines? Any insights?

Paul A. Maleh

Right now I'm looking to add depths of the portfolio I have right now both in the geographic footprints standpoint and a service portfolio. I think all of our lines would benefit from added debts and by adding quality consultants. So we're not looking to expand outside of those lines of business, and I'm not looking to really go outside of North America and Europe at this time.

Operator

At this time, we have reached the end of the Q&A session, I would now turn the call back over to Mr. Maleh for closing or additional remarks.

Paul A. Maleh

Okay. Again, thank you to everyone for joining us today. As always, we appreciate your time and interest in CRA, and we look forward to updating you on our progress next quarter.

With that, this concludes today's call. Thank you, everyone.

Operator

Thank you. This does concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.

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