Apr 25, 2013
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
Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division David Gold - Sidoti & Company, LLC Timothy McHugh - William Blair & Company L.L.C., Research Division
Operator
Good morning, and welcome to the Charles River Associates First Quarter Fiscal Year 2013 Conference Call. Today's call is being recorded.
You may listen to the webcast on CRA's website located at www.crai.com. In addition, today's news release and prepared remarks from the company's Chief Financial Officer are posted on the Investor Relations section of the site.
With us today are CRA's President and Chief Executive Officer, Paul Maleh; and Chief Financial Officer, Wayne Mackie. At this time for opening remarks and introductions, I would like to turn the call over to Mr.
Mackie. Please go ahead, sir.
Wayne D. Mackie
Thank you, Christine. Statements made during this conference call concerning the future business; operating results; tax rates; financial condition of the company; the anticipated, expected or intended impact of companies key hires and expense management initiatives; and statements using the terms anticipates, believes, expects, should, prospects, targets, on track, optimistic, remaining positive, hope, opportunities or similar expressions are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.
These statements are based on management's current expectations and are subject to a number of factors and uncertainties. Information containing these forward-looking statements is inherently uncertain and actual performance and results may differ materially due to many important factors.
Such factors that could cause actual performance and results to differ materially from any forward-looking statements made by the company are included in the company's filings with the 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.
I would encourage everyone to refer to today's earnings release for a full reconciliation of these non-GAAP items to their GAAP equivalent. Before turning the call over to Paul, I want to acknowledge the tragic events at last week's Boston Marathon.
Our headquarter's location is a block from the marathon finish line, and the marathon is something celebrated by our employees and colleagues every year, with many of them participating as runners and spectators. All of our employees are safe, yet our thoughts continue to be with the victims of this horrific event.
Let me now turn the call over to Paul for his report. Paul?
Paul A. Maleh
Thanks, Wayne, and good morning, everyone. We're disappointed with the slow start of the year.
However, we believe the fundamentals of our business are solid and we remain positive about our prospects going forward. We have more robust service offering than a year ago and an exceptional team of professionals to deliver upon it.
With the senior level hires, who recently joined our firm, many of our practices, including Antitrust & Competition Economics, Finance and Life Sciences are well positioned to build upon their prior success. Our goal is to deliver growth across our portfolio in fiscal 2013.
In the first quarter of fiscal 2013, our non-GAAP revenue declined 9% year-over-year and 6% sequentially. Utilization for this first quarter was 67% as compared to 68% sequentially and a utilization of 68% in the first quarter of fiscal 2012.
Another factor contributing to our bottom line results was our effective tax rate for the fiscal quarter, which was 13.3% on a non-GAAP basis, down from 34.2% in the last fiscal quarter and 76.8% in the first quarter of fiscal 2012. We expect a more normalized non-GAAP effective tax rate over the remainder of 2013.
Wayne will provide more information about the tax rates later in the call. Turning more specifically to our results during the fiscal quarter, certain practices across our portfolio performed well.
Let me provide some color on that first. The Antitrust & Competition Economics practice, our largest, continued to deliver strong results.
During our last earnings call, we reported that the European competition group posted its highest quarterly and annual revenue and we're pleased to report similar news again for the global practice, encompassing both North America and Europe. Through a combination of organic contributions and results from our recently added colleagues, the global Antitrust & Competition Economics practice had a record quarter in Q1, contributing its highest revenues ever.
The expertise of this practice was recognized with a variety of awards by Global Competition Review, including Cristina Caffarra, Head of our European Competition Practice, was recognized as Economist of the Year. Several cases on which CRA worked on won team awards, including the Merger Control Matter of the Year Award in the Americas and the Behavioral Matter of the Year Awards in both the Americas and in Europe.
Fiona Scott Morton, a Senior Consultant to CRA received the Academic Excellence Award. Also, earlier in the first quarter, 3 members of the practice, Practice Leaders Margaret Sanderson; Vice President Diana Jackson; and Senior Consultant to CRA, Fiona Scott Morton were recognized by Global competition Review in its Women in Antitrust 2013 feature.
In addition, 35 of CRA's competition economists and academic affiliates were included in the 2013 International Who's Who of Competition Lawyers & Economists. For the fourth consecutive year, CRA was the -- CRA had the most competition economists named to the list compared with other firms in our sector.
We're incredibly proud of this practice. Also within Litigation and Regulatory Consulting, our Intellectual Property and Labor & Employment practices continued to build upon the momentum they gained in 2012 and performed well during the fiscal quarter of 2013, serving corporations directly, as well as their outside legal counsel.
Within Management Consulting, the Auctions & Competitive Bidding practice continued to deliver solid performance during Q1. Since 2008, the Auctions & Competitive Bidding practice has managed GlobalDairyTrade, an Internet-based trading platform we designed for Fonterra, a leading global dairy company.
More than $9 billion worth of products had been sold on this platform, and the number of sellers using the platform has grown. Approximately 800 bidders are qualified to bid in the trading events.
In addition, the practice designed and manages the trading platform for the sale of Ocean Spray's cranberry concentrate. However, during Q1, lower-than-expected results in certain practices within both Litigation and Management Consulting largely offset the performances of these practices.
Within Litigation, the Finance practice, historically consistent and solid performer, experienced a simultaneous slowdown of several ongoing litigation engagements. Within Management Consulting, Life Sciences and Marakon, are prone to the quarterly variability often characterized by the boutique Management Consulting sector.
Their engagements are large and can take longer to win, leading to greater quarterly variability. However, looking back to fiscal 2012, our Management Consulting portfolio produced solid results for the full fiscal year despite a slow start.
The performance of that portfolio going forward is supported by the senior level hires we welcomed across our portfolio in the latter part of 2012 through Q1 of 2013. Some of these hires effectively began at the midpoint of the first quarter, so a portion of their time with us during Q1 was focused on integration-related activities.
We are pleased with the progress to date and the quality of the projects and leads the teams are introducing to the firm are outstanding. We're excited to have this group of renowned academics and consultants on board, and we expect to realize their full contributions as we move through fiscal 2013.
In terms of our operations during the quarter, we remain on track with our expense management initiative. In the first quarter of 2013, our non-GAAP SG&A, after adjusting for payments to nonemployee experts, decreased by $2 million from the first quarter of fiscal 2012 and was essentially flat compared to the fourth quarter of fiscal 2012.
Our team has done an excellent job in this area. Looking ahead, despite our slow start to the year and a weaker-than-expected M&A environment in the first quarter, we remain optimistic with respect to CRA's annual performance for fiscal 2013.
We're focused on driving profitable organic growth and realizing the full contributions of our new colleagues as we move beyond their integration. With that, I'll turn things over to our CFO, Wayne Mackie.
Wayne?
Wayne D. Mackie
Thanks, Paul. I would like to call your attention to some key financial metrics and other factors that you should consider when assessing our Q1 fiscal 2013 performance.
First, in terms of our consulting headcount, we ended our fiscal quarter with a total staff of 480, which consists of 349 senior staff and 131 junior staff. This is a net increase of 16 consultants from the 464 we reported at the end of Q4 fiscal 2012.
This increase reflects the addition of new Litigation consultants, some typical attrition, as well as planned departures. I should add that during Q1, we had no departures of our key revenue generators.
Our company-wide utilization for Q1 of fiscal 2013 was 67%, down slightly from 68% in Q4 of fiscal 2012. Our target utilization remains in the low to mid-70s.
Our international revenue contribution for this first fiscal quarter was approximately 24%, which is an increase from 20% we recorded in Q1 of fiscal 2012. Our effective tax rate this quarter on a non-GAAP basis was approximately 13.3%, down significantly compared with the 34.2% we recorded in Q4 fiscal 2012 and 76.8% we recorded in the first quarter of fiscal 2012.
The primary reason for the low effective tax rate in the first quarter of fiscal 2013 were a benefit associated with a favorable resolution of a tax matter and international profitability sheltered by net operating losses. We expect a more normalized GAAP -- non-GAAP effective tax rate of approximately 40% for the remainder of 2013.
For the first quarter of fiscal 2012, lower international revenues produced a loss for our international operations, primarily in the Middle East, and we were not able to record a tax benefit of those losses, which resulted in unusually high effective tax rates for the fiscal quarter. Turning to the balance sheet.
DSO at the end of this fiscal quarter were 102 days compared with 98 days at year end. DSO in Q1 '13 consisted of 66 days of billed and 36 days of unbilled compared with 69 days of billed and 29 days of unbilled in Q4 of fiscal 2012.
Going forward, we are continuing to target DSO of 100 days or less. In terms of our cash position, we concluded the first quarter with approximately $30.6 million cash and cash equivalents.
As expected, this is down from the $55.5 million we reported at the end of Q4 fiscal 2012. Subsequent to March 30, 2013, as expected, the company utilized its line of credit to pay remaining prior year bonuses and obligations to senior revenue producers.
With respect to our credit facility, we are pleased to announce that we closed yesterday on an expanded and improved revolving credit facility. This facility is for $125 million and a 5-year term, up from $60 million and a 3-year term.
In addition to RBS Citizens, we are excited to add Bank of America and Sovereign Bank as banking partners. The new facility permits multicurrency borrowing in U.S.
dollars, euros and British pounds and provides improved financial covenants and pricing. In addition to using this new facility for working capital purposes, it will also provide us with the financial flexibility to pursue select talent acquisitions.
And finally, we did not buy any stock back this quarter. That concludes my remarks, Christine, and we'd like to open the call up for questions.
Operator
[Operator Instructions] Our first question comes from the line of Joseph Foresi with Janney Montgomery Scott.
Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division
My first question is just on the new hires, it sounded like they came in midway through the quarter. Is there any way you could provide us with some scale to judge when they'll be sort of fully integrated?
And anything that you could give us sort of on the numerical side. I mean, obviously, we could back in on the revenue per employee.
But on the numerical side of what you're expecting the ramp time to be and how much they can contribute?
Paul A. Maleh
Sure. Joe, this is Paul Maleh.
So you're referring to the colleagues that joined us from Navigant, so out of the former Chicago Partners. As you know, the group of people who joined us really touched upon 3 main areas of the firm: one was our Competition and Antitrust Economics, Labor & Employment and also our Finance practice.
The ramp-up of all of those is slightly little different as we transition practices -- as we transition projects. On the Competition and Labor & Employment side, what I can tell you now is those groups are basically at capacity.
They are using resources from other offices and other practices in order to deliver the work on the projects that they brought us. So of course, there's some transitionary issues as we go through the integration, moving projects across.
But we expect to see a very healthy contribution in Q2 and going forward. On the Finance side, they're also getting quite busy.
I wouldn't say that, that group is at capacity of yet. But we've also won a number of joint engagements with their new Finance colleagues, both through referrals that they brought to CRA and referrals that CRA brought to them.
So it's pretty close to as we expected. There's not really a lot of downside surprise.
But transition takes a little time.
Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division
Okay. So we should expect that to be sort of fully ramped, at least most of the practice, heading into 2Q or at the end of the second quarter?
Paul A. Maleh
That's our expectation.
Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division
Got it. Okay.
And then my second question is just on the M&A front, that's been kind of lumpy, yet it seems like you're doing pretty well on the antitrust stuff. What are your -- have you moderated your expectations for demand in that particular area?
And how should we think about sort of your feeling about the overall demand backdrop as we're sort of 1/4 through the year so far?
Paul A. Maleh
Sure. I think it's a good point you raised to divide up the demand side on the Competition Antitrust Economics into those 2 pieces: the first being demand related to Mergers & Acquisitions and the second being demand related to Antitrust.
One of the reasons we were very excited about the addition of the colleagues who joined us from Navigant was that they brought a lot of depth on the antitrust expertise and that really complemented nicely the long legacy of M&A expertise at CRA. So the antitrust environment is healthy.
Case filings look healthy. We don't see any real dip over the past couple of quarters.
So we are optimistic that, that may be continuing. On the M&A side, I think we're about as surprised as every other participant in that marketplace as to the low levels that were experienced during Q1.
The market environment is there to support M&A activity. You know the statistics as well as I do.
And I haven't necessarily seen any people reducing their expectation significantly or continued decline in the level of M&A as we go into Q2 and beyond. But it's sort of a wait-and-see.
We don't necessarily have any better information than is generally available to market participants.
Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division
Got it. Okay.
And then the last question for me on the margin front. Expenses were held pretty steady.
What is the thought process there? And any color you can give us on sort of what you're thinking about for margin expansion going forward?
Is the idea to keep SG&A at present levels and then let the revenue ramp as you take on these new hires and integrate them, and that drives the margin? Or how should we think about that sort of theoretically and numerically?
Paul A. Maleh
I think theoretically, there's no reason why our SG&A, excluding the performance payment, shouldn't be in an 18% to 20% range. We're structured in order to operate efficiently at those levels.
So with revenue growth, we should be able to see margin enhancement. It is not necessarily through increased cost-cutting measures on that side of the equation.
Operator
Our next question comes from the line of David Gold with Sidoti & Company.
David Gold - Sidoti & Company, LLC
Can you speak a little bit about -- on the Litigation side, I guess, there's some commentary about, particularly in the Finance practice, simultaneous slowdown of several engagements. Was there anything happening there?
Were the slowdowns, say, related to each other? Or is it more just coincidental that they happen to all sort of happened at the same time?
Paul A. Maleh
No, that would be too easy if we actually saw a trend in that. But they were pretty much mutually exclusive on the slowdowns.
We have some large engagements that really haven't begun work on. But it is just more in the holding pattern right now.
But I couldn't say they're related or related to anything we're doing as a corporation.
David Gold - Sidoti & Company, LLC
Okay. So there's some large engagements that presumably you've won and have in-house, but those haven't started just yet?
Paul A. Maleh
Correct.
David Gold - Sidoti & Company, LLC
And any sense on -- I guess, what I'm getting at is, I guess, as you say it'd be too easy if there were a trend, but is there anything to it? Is it economic sensitivity that's holding folks up on the newer assignments?
Or is it just as simple as cases haven't started yet?
Paul A. Maleh
It's -- we're all speculating with respect to the economic uncertainty. Results, thus far, in terms of all the earnings releases by large corporations have been mixed.
And I'm sure those results -- those mixed results are creating that uncertainty. We're seeing it in the M&A marketplace.
So it's an environment that quite frankly that we've been operating within now for the last several quarters. So we would love a little bit of a tailwind here.
But we've been in this environment now for a good 5 years.
David Gold - Sidoti & Company, LLC
Right, got you. Okay.
And then part 2 on the Management Consulting side, presumably -- I guess, what I'd be curious about is on both of those businesses, you were -- you expressed some optimism. Now on the Litigation side, if you have some engagements that you're waiting to start, I get it.
On the Management Consulting side though, what gives you that confidence?
Paul A. Maleh
I know it may sound a little bit like mom and apple pie, but the quality of the colleagues I have on the Management Consulting side, in particular, the 2 practices that I mentioned of Life Sciences and Marakon, it's exceptional. And ultimately in a professional services firm, exceptional quality will drive performance.
They've had a long sustained history of delivering performance, and those colleagues are with us, committed to CRA. And I don't see their performance changing into the future.
When we talk about these practices, I know it may be frustrating for the analysts in trying to forecast performance, but they are value producing to this company. We had variability with those 2 practices in 2012 and both -- that group was accretive to the firm, producing financial results north of the company average.
So I feel good about that. I would make those investments every day because I think ultimately, our shareholders will get the returns they're seeking.
David Gold - Sidoti & Company, LLC
Got you. And that brings us -- that brings me to another question.
The expanded credit line -- presumably a couple of things, one -- I mean, I'd note that your comment was the dollars would be used for working capital and also for presumably some new hires, a little bit color there, if you can. Are there particular practice areas where you'd like to add?
And then with that part 2, headcount plans for this year based on what you know now?
Paul A. Maleh
Sure. We're real excited about the new line of credit.
First and the fact that you get to add the quality of our banking partners and with RBS and Bank of America and with Sovereign, I think they bring a lot of other services to us besides the addition of capital. So we're looking forward to working on that relationship.
The terms are very advantageous for us. Sitting here today, we have access to the full $125 million of that facility.
And just because we have access, though, does not mean we have a planned spending spree in order. We're going to be prudent with our expenditures, just as we've been in the last 12 months.
We're real happy with the additions we made to our portfolio. And the additions that we're looking at going forward are going to be primarily across those 2 main lines of business.
I don't have any plans to go into a line of business that we're currently not in. It's going to be continuing to add depth and quality to the existing portfolio.
Wayne D. Mackie
David, one thing I'd add on the new arrangement is it, as I mentioned, has a multicurrency feature to it, which allows us to actually hedge even more efficiently than we've been able to do. We've been pretty successful at self-hedging for some time.
But this allows us to do it even more effectively, by being able to borrow in different currencies and in different entities. So it's not just the parent company that will be able to borrow underneath this new arrangement.
David Gold - Sidoti & Company, LLC
Got you. And just lastly, if you can just make a comment on headcount plans for the year?
Paul A. Maleh
Yes. I think as Wayne mentioned, we expect to see headcount grow by 10% for the full year.
So I believe we started with a 460-something number at the end of Q4 that have gone up during Q1, and we expect to see additional increases as the year progresses.
Operator
[Operator Instructions] Our next question comes from the line of Tim McHugh with William Blair.
Timothy McHugh - William Blair & Company L.L.C., Research Division
First, I just want to ask on the addition of the people from Chicago Partners. That you had them for roughly 2 months in the quarter, I believe.
As we look at the cost structure, I know it's not a full quarter, but is that representative of the cost side of the equation that they bring over as we model forward here?
Paul A. Maleh
I think looking at Q1, I wouldn't say that is necessarily representative of the cost structure going forward because any time we have integration or the transferring of projects or people going through various training modules, you're going to have a little bit of a disconnect between their -- costs related to those professionals and the revenue that they are generating. As we are past this first quarter phase, the revenue and cost should be a little more aligned.
So it's not necessarily we have new costs that are going to be introduced. But the revenue and the cost match up a little better as we go forward.
Timothy McHugh - William Blair & Company L.L.C., Research Division
Okay. So -- but that was -- I guess, so what you're saying is as their productivity improves, you would get higher -- the bonus accruals will have to go up?
Paul A. Maleh
Correct.
Timothy McHugh - William Blair & Company L.L.C., Research Division
Okay. Can you clarify the -- you made a comment about SG&A being 18% to 20% in a normal case.
I believe you said absent performance fees or something like that.
Paul A. Maleh
Yes. Okay.
So the way we report SG&A, the payments made to nonemployee [indiscernible] comes on our SG&A line. For many of our competitors, it is in the cost of goods sold line.
So we always include that line item separate to provide shareholders and analysts the ability to do a direct comparison.
Timothy McHugh - William Blair & Company L.L.C., Research Division
Okay, that's fair. On the M&A environment, can you just clarify, I mean, you talked about M&A a couple of times as being a headwind but you've also talked about Antitrust and Competition practice doing well.
So to the extent it was a headwind, are you to talking mainly about the business consulting side, the Management Consulting? Or is there...
Paul A. Maleh
I think -- yes, I think it's -- actually M&A impacts both our legal regulatory side of the business and also on the Management Consulting side of the business. The Competition Antitrust practice, they continue to build on their share and their presence in the marketplace.
But when you have levels of M&A activity as many of these industry analysts are talking about, 3-, 5-year troughs, it's hard to maintain that momentum. So clearly when we're looking forward, you have to be cognizant of those potential impacts.
Operator
At this time, we have reached the end of the Q&A session. I will now turn the conference over to Mr.
Maleh for any closing or additional remarks.
Paul A. Maleh
Again, thank you to everyone for joining us today. As always, we appreciate your time and interest in CRA, and look forward to updating you on our progress next quarter.
This concludes today's call. Thank you.
Operator
This concludes today's teleconference. You may disconnect your lines at this time.
Thank you for your participation.