Good day, everyone, and welcome to Charles River Associates Second Quarter 2021 Earnings Conference Call. Today's call is being recorded. The company's earnings release and prepared remarks from CRA's Chief Financial Officer are posted on the Investor Relations section of CRA's Web site at crai.com. With us today are CRA's President and Chief Executive Officer, Paul Maleh; Chief Financial Officer, Dan Mahoney; and Chief Corporate Development Officer, Chad Holmes. At this time, I'd like to turn the call over to Mr. Mahoney for opening remarks. 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 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 COVID-19 pandemic and any potential impact 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. Let me now turn it over to Paul for his report. Paul?

Thanks, Dan, and good morning, everyone. Thank you for joining us today. The second quarter of fiscal 2021 demonstrated continued momentum in the business as strong demand for our services drove CRA's outstanding performance. Building on the impressive start of fiscal 2021, CRA again reported the highest quarterly revenue in the company's history, increasing 20.5% year-over-year to $148.2 million. Our expansion was broad-based with 8 practices recording year-over-year revenue growth of more than 20%. Geographically, our growth was also balanced, with revenue from our North American and international operations increasing by 21.9% and 14.4%, respectively. The second quarter marked the 22nd consecutive quarter of year-over-year revenue growth, with CRA growing by more than 10% year-over-year in 15 of those quarters. CRA's top line growth during the second quarter drove significant profit expansion. Specifically, non-GAAP net income, earnings per diluted share and EBITDA grew year-over-year by 82%, 91% and 61%, respectively. This growth resulted in the highest quarterly levels for each of these profit metrics. It was truly an exceptional quarter, top to bottom. I would now like to highlight some of the services provided during the quarter. Within legal and regulatory, our Antitrust & Competition Economics practice grew revenue by approximately 55% year-over-year. This growth established a new high in quarterly revenue for the practice as demand for antitrust and merger-related services remains strong. M&A markets continue to rebound from pandemic lows and reached historic highs. Worldwide M&A activity increased 131% during the first half of 2021 compared to year ago levels and represented the strongest first half of any year for mergers and acquisitions since records began in 1980. Against this backdrop, CRA worked on transactions across a range of industries and geographies. For example, a team of competition experts supported emerging parties and a recently completed transaction, combining…

Thanks, Paul, and hello, everyone. I want to provide a few comments about our capital generation and deployment during the quarter. CRA remains committed to maximizing long-term value per share through the prudent deployment of capital. Given CRA's strong cash flow generation, we expect to invest in the business for profitable growth while simultaneously returning meaningful capital to our shareholders. Against the backdrop of the pandemic, CRA continues to generate strong cash flows. For the trailing 12 months through the second quarter of fiscal 2021, CRA's adjusted net cash flows from operations were $81.7 million or 14.8% of trailing 12 months revenue. As previously announced, we completed a modified Dutch auction, self-tender offer in the second quarter that resulted in the repurchase of 337,837 shares at $74 per share for a total of $25 million, demonstrating both our confidence in our long-term outlook and our commitment to returning capital to shareholders. When these repurchases are combined with the $1.9 million of dividend payments, we returned $26.9 million of capital to our shareholders during the second quarter. Through the first 6 months of fiscal '21, we have returned $38.6 million of capital to our shareholders through a combination of share repurchases and dividend payments. As referenced in prior earnings calls, we continue to aim to return half of our adjusted net cash flows from operations to our shareholders, while still investing in the growth of CRA. 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 website under prepared CFO remarks. Before we get to questions, let me provide a few additional metrics related to our performance in the second quarter of fiscal 2021. In terms of consultant headcount, we ended the second quarter of fiscal 2021 at 833, which consisted of 141 officers, 483 other senior staff and 209 junior staff. This represents a 3.9% increase compared with the 802 consultant headcount reported at the end of Q2 fiscal 2020. We expect year-end headcount to increase by roughly 6% relative to the end of fiscal 2020. Non-GAAP selling, general and administrative expenses, excluding the 3.2% attributable to commissions to non-employee experts, was 13% of revenue for the second quarter of fiscal 2021 compared with 15% a year ago. This quarter's ratio was positively impacted by the strong revenue for Q2 and effective management of our overhead. We will continue to monitor our discretionary expenses to proactively mitigate the financial impacts related to the pandemic and to efficiently manage our transition back to a more normal operating environment. The effective tax rate for the second quarter of fiscal 2021 on a non-GAAP basis was 25.8% compared with 24.8% on a non-GAAP basis for the second quarter of fiscal 2020. Turning to the balance sheet. DSO at the end of the second quarter was 103 days compared with 92 days at the end of the first quarter of fiscal 2021. DSO in the second quarter consisted of 66 days of billed and 37 days of unbilled. At the end of the second quarter, the company's liquidity remained strong, totaling approximately $144 million when taking into account the available capacity on our revolving line of credit and our cash balance. Looking more closely at the components. At the end of the second quarter, we had $45 million of outstanding borrowings under our revolving credit facility. We concluded the second quarter of fiscal 2021 with $14 million in cash and cash equivalents, with the majority residing internationally. That concludes our prepared remarks. We will now open the call for questions. Rob, please go ahead.

[Operator Instructions] Our first question comes from Andrew Nicholas with William Blair.

First question I wanted to ask was on the antitrust. Anecdotally, feels as though kind of review processes are taking a bit longer than usual. There's obviously a ton of volume to get through, so that could be one factor. But I'm wondering if that's in line with what you're seeing in that business. Are projects longer, bigger? And how would you anticipate project duration and size trending on a go-forward basis, given what you're seeing in antitrust specifically?

Andrew, we really haven't seen a shift in the composition or makeup of the projects that the antitrust practice is experiencing or for that matter, the firm as a whole. The size and duration of those projects are similar to what we have experienced pre-pandemic. We are seeing some older projects being worked on now. That's a slight increase, but it's well within the range of outcomes that we have experienced during the pre-pandemic period of time. So I can't say I have noticed the shift in project composition that you're describing.

And then, obviously, M&A activity has been at record levels, as you mentioned in your prepared remarks. Just kind of wondering, first, if there's any way to dimensionalize the impact of elevated M&A on the company as a whole in the first half of the year? And then relatedly, what you're assuming within your guidance in terms of M&A volumes in the back half of this year?

Our Antitrust & Competition Economics practice is, was and still is the largest practice at CRA, a large contributing factor is M&A activity. We are the leading provider of those services worldwide. So clearly, we enjoy a benefit when we see a pickup in activity, but even more importantly, of complex combinations with the entities. So that has been a positive. When we are looking at our guidance or forecast going forward, we're really looking at the inflow of matters that we have received to-date. I am not sitting here projecting whether M&A activity will continue to rise or stay flat. All indications are, at least over the next 3 to 6 months, we shouldn't see a dramatic change in that activity, just given the volumes and the cost of money and the desire by various firms to still seek value-creating combinations. So we're not forecasting any kind of substantive change.

And if you wouldn't mind me squeezing one more in here on the hiring environment. Just curious how you describe recruiting right now, the ability to add talent to the extent that you are hiring aggressively? And then in a similar theme, if you could make any comments on attrition at the firm relative to historical levels, that would be appreciated.

Hiring the best and brightest always takes a lot of effort. So I would say that it is never an easy undertaking. What I can say is if I'm looking at university level hires, our acceptance rate that we've experienced during the pandemic months has not differed significantly from that, what we experienced during pre-pandemic times. If anything, the acceptance rate is up slightly during the pandemic relative to pre-pandemic. The wages that is required to secure the top talent, we also have not seen any kind of substantive change over these last six quarters of the pandemic relative to pre-pandemic levels. What I can say is, if you're looking at more senior hires, maybe the hiring time line is lengthened just a bit because it's a little more challenging and difficult to get to know the candidate and for them to know us and determine whether there's a fit. But there too, the expected conversion of those opportunities has not differed significantly. It just may be taking a little longer.

Our next question comes from Kevin Steinke with Barrington Research.

I wanted to start off by talking about legal and regulatory consulting and the strong growth there. You obviously highlighted the rebound in growth in case filings and in judgments. I'm wondering if maybe there's a significant backlog of pent-up demand that's now coming through in legal and regulatory with things starting to move forward a little bit more in the court systems. I also wanted to tie that related to the metrics you gave on project originations up 40%, does that indicate some projects that maybe were on hold now starting to ramp up or am I off base there? So any comments on that would be helpful.

I'm going to start by saying, although the pandemic has been challenging for so many reasons for the world, for this corporation, we've actually have fared pretty well. So we haven't seen a contraction of the business. In fact, in the six quarters that have been impacted by this pandemic, I believe that we have grown top line revenue more than 10% in five of those six quarters. So, the portfolio has performed exceptionally well throughout this process, which means that not only are we have demonstrated an ability to service projects already in the portfolio, we have also demonstrated the ability to generate new lead opportunities throughout these past 6 quarters, and the second quarter was no different. With respect to, are we seeing necessarily a -- I don't know what to call it here, a little surge in demand associated with the filing pickup and the court pickup, that's hard to say, but I will break that up into two pieces. One is, are we working on older projects, maybe projects that had been stalled during the pandemic as now the courts are opening up? Are we seeing more revenue generated from those projects? As I mentioned to Andrew, what we have observed across the project portfolio doesn't look discernibly different than what we were used to pre-pandemic. So I would add that. Secondly, the pace of new matters that we're bringing in, we're really pleased to be able to announce that we grew new project opportunities by 20% and new project originations by 40%. So we're going to welcome those kind of numbers any day of the week. But then again, we were also enjoying really healthy levels in the preceding quarters leading up to Q2. So more to come, small sample set to observe, whether we are seeing a surge in demand associated with the court starting to open up. But standing right here, I would say, it looks very similar to the strong performance we had seen previously.

And just wondering, with the change in the presidential administration, have you seen any noticeable difference in the level of antitrust enforcement or scrutiny of M&A transactions?

There's clearly a lot of dialog coming out of the administration about their desire for increased enforcement. I would say it's probably a little too early to comment on whether we have seen a direct impact on that demand environment. What I can say if the actions are consistent with the words coming out of the administration, one would definitely expect an increase in the demand environment for services like those provided by CRA.

Just wanted to ask about the margin guidance and the increase there. I asked a similar question last quarter. But just maybe can you discuss some factors behind the increase in the margin guidance in terms of the stronger revenue growth, maybe continued delays in travel and entertainment expenses versus some of those sustainable cost savings that you thought you might be able to realize based on your learnings from operating during the pandemic?

The strong profit margins are driven by two main drivers here. One, it's driven by really strong revenue. We got back to what we would consider to be our desired utilization rate much faster than was anticipated at the beginning of the year, with Q1 being at 76% utilization and Q2 at 75% utilization. So we've been able to deliver services in an optimal manner. So that's clearly going to contribute to strong profitability. With those strong revenue levels, we have been able to really leverage low SG&A expenditures. I believe this quarter, we -- excluding perf payments, we were around 13% of net revenue. A big driver of that is we're not traveling, as a firm. Besides the occasional business trip, our consultants are still working almost entirely on a virtual basis. So not -- we're not incurring those kind of indirect expenses that we have previously. We are looking at -- through the first 6 months, I believe, a EBITDA margin basis of around 12.6%, if I'm not mistaken on that, so it was a very strong start. And given that the return to some kind of pre-pandemic levels of travel is still probably 3 to 6 months off at best. We felt pretty comfortable on increasing the profit margin range to the 11.2% to 11.7% quoted as part of our guidance. How that is impacted in the future is really going to depend on our return to some kind of normal levels. We've learned a lot over these past 6 quarters of how to run our operations more efficiently. So I do think there will be sort of a structural step change down in SG&A levels, as we return to some level of normalcy, whenever that happens. But I am not, and I repeat, I am not saying that the new level will be 13%. I think pre-pandemic, we were operating right around 18% to 18.5% of net revenue for SG&A, excluding perfs. I would love to see us operating once we return to more of a steady state normal world, somewhere in the 16% to 17% range.

And I also wanted to ask about the press release you had in July on your new hydrogen service offering and adding a couple of senior consultants to lead that effort. Yes, I just first wanted to ask about the opportunity that you see there. And secondly, just mechanically, why that is within the Marakon practice and not the Energy practice?

Both Marakon and our Energy practice are continually working with energy providers on how best to optimize their generating portfolio. As you know, there's a strong movement towards clean energy. So introducing clean energy alternatives to our clients, having the expertise to discuss those alternatives with them is imperative on delivering those services. So, we were seeing more requests by our clients in terms of knowledge and services related to hydrogen and we thought that here's an opportunity to raise our game, so to speak, by adding these resources. The resource and the team delivering those service is a combined effort, between Marakon and the Energy practice. Those two practices regularly work together. And the other thing we were trying to highlight during the directed comments on this call, many of our practices work together. We are organized by practice largely internally to help us manage our consulting staff to best staff them. But when we go to market, we go to market in a configuration that best addresses our client needs. So having the value perspective that Marakon brings to the game and the industry expertise that the Energy practice brings has been a nice match.

And I just wanted to lastly ask just about balance sheet and cash flow, just there seem to be a little more sequential buildup in accounts receivable than normal. So I don't know if this is related to the strong demand or Dan, anything going on from that perspective with receivables and cash flow?

I'll start and then I'll kick it over to Dan. Growth takes some capital, okay. And we've been growing pretty substantially now over the last several quarters, so that's clearly consuming some of our working capital. What I can tell you is that the quality of those receivables really has not changed during this time period. Dan, if you have any other color to add?

Yes, exactly. So I would agree with that, Kevin. I think if you look at -- just to sort of carry on that point, you look at our DSO stats, so in the first quarter, our DSO was, I think, unusually low as we had -- we collected on some longer-dated items. And so that was down in sort of that 92 day level. In this quarter -- so it came back and our -- as our AR picked up quarter-over-quarter, like you pointed out, but it's still below the DSO metrics, still below our historical average for the second quarter. So as we grow, we would expect to see that, nothing unusual, like all said with our collection activities or the structure or the collections that we're receiving. And we tend to see an uptick in that in the summer months for Q3, and then it tends to come down again later in the year. So, pretty consistent pattern with what we've seen historically, and that's what we would expect going forward.

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

So I wanted to start with just sort of a quick observation. I was sort of curious as to if you could talk a little bit about the complexity of the work that you're seeing? Because as I sort of go through the numbers and say with a couple of things, it seems as though, I don't know if it's a matter of maybe bill rates are higher, pricing is higher or if it's a matter of the mix of business, things being more complex and thereby maybe some more senior folks that are quite busy. Just wondering if you could talk a little bit about that and if that's any different than maybe what you may have been expecting or what you've seen in the past?

So let me try to address the -- your question, I'm not quite sure I fully understood it. But as I commented, both with Andrew and with Kevin, we haven't seen any kind of market shift in the composition of cases, in the complexity of cases that we've been addressing. What we know as a firm is that, if we could keep SG&A at 13% and we're operating in the mid-70s of utilization, we will enjoy really, really strong profitability like that, that has been delivered now over the last several quarters. But I can't say that we're doing anything different. But one thing that the virtual world has introduced, and we're really quite excited about it continuing, I think we're working across borders, by that, I mean, offices, geographies, more efficiently during this pandemic period than we ever have as an enterprise. So, I think that provides real exciting revenue opportunities, profit enhancing opportunities going forward. And the reason it's profit enhancing is that we are seamlessly using capacity irrespective of where it exists. By capacity, I mean, consulting capacity within the organization, irrespective of whether I'm sitting here in Boston today, whether that is residing in our San Francisco or Berkeley office, or whether it's residing in a practice other than the one I'm situated in. So, all of these kind of efforts does create for a more optimal delivery model, but that is really the only positive progression to speak of. Other than that, it's been business as usual, which is pretty damn good.

And then I guess maybe the way I was trying to sort of get to is a little bit along the lines of sort of the pricing dynamic and maybe from an inflationary standpoint or if you're sort of putting through price increases, if you're talking about sort of year-over-year similar services. And it seems as though, if so, those price increases would be received without much in a way of push back, but something has...

If I look at the last half dozen years or so, we've been increasing rates about 2% to 4% per annum. Those rates have stuck in terms of our ability to deliver at those rates, while still creating value for our clients. That experience hasn't really changed over these past 18 months, that's CRA.

And then shifting gears over to bringing folks on. I think what was mentioned was you were looking at bringing headcount up end of year by 6% per annum, if I heard that correctly. So, I was wondering if that gets -- would that be sort of more of a normalized seasonal back half adding up junior talent, is that kind of what we should be thinking of for the remainder of this year?

For the remainder of the year, right now, the 6% in terms of year-end headcount growth is our best guess of where we will be by the end of the year, okay? So that's taking consideration our incoming hires and high likelihood hires that we are expecting over these next 4 months or so. With respect to the outlook beyond that, we're just trying to keep a close eye on the demand environment to do as good a job as we can on matching the supply, being our consulting workforce and the demand for those services. So, more to come on that as we see the year unfold and as we start thinking about guidance for 2022.

And certainly, the growth has been very broad-based, which has been clearly communicated. I wanted to get a sense of, are there some practice areas that you think have maybe accelerated at a faster pace due to the challenges of pandemic or in response to client activity that is just pandemic specific as to, whether or not it's the types of opportunities that may have just simply been enhanced due to changing dynamics of challenges as opposed to, for lack of better term of it folks sort of going back to the path as opposed to creating a new normal?

A couple of comments there. I guess the first comment, when people believe they've heard enough about broad-based contributions, it's time for me to double down on that even more so. I don't think you can script out the way a portfolio should operate better than the way CRA's portfolio has been operating. It's wonderful to think like, as an example, during 2020, during the first half of the year, we relied heavily on the exceptional performance of the life sciences practice and the forensic services practice in terms of leading the way. With competition practice during the first half of 2020, experiencing a flattish type of delivery services. And here we are, competition excelling during this first half as is a lot of other, the legal regulatory services. So to say, one is benefiting from those services. As I stated previously, the only practice I could highlight on that and I'm not sure this is pandemic related, but more the evolving nature of technology in our world is our forensic services practice that has seen a market increase in work related to cyber incident response. And work related to damage estimations associated with those breaches. But I don't know whether that's necessarily pandemic related, Marc, or more a continuation of what the world has been experiencing.

So wondering if you could touch then on a little bit about the potential acquisition pipeline and maybe the opportunity set that you see as far as potentially adding or maybe what that might look like domestically versus internationally, maybe what that potential pipeline might look like today? And maybe if there are any attractive areas or geographies that we should be thinking about?

I'll let Chad address that question.

The pipeline question is a great one, and the answer is similar to what I've shared in the past. We're always looking to add high-quality individuals to the CRA team and remain active in the market for vetting those types of opportunities. The geographic spread and the service offering spread, I would say, roughly maps to the positioning of CRA. We're interested in opportunities that align with our service offerings and our geographies and we're seeing good volume along all of those dimensions. So I would say the pipeline is as full as it has ever been, but our standards have not changed. We're still looking for fit and have a fairly high bar. We've added people through the pandemic, including in the first half of this year and expect to continue to do so as the year plays forward, and we look towards 2022. So it's more of the same. We're not going to deviate. We're not looking to necessarily add a third leg to the stool or a fourth leg to the stool just for diversification. We're really pleased with the portfolio of services we have, and we're just trying to find high-quality performers to join in the fun.

And then the last one from me, I was sort of wondering how things are progressing for you as far as having granted, I think we're now about anniversarying the period of time when everyone was working remotely. And I was wondering if you could get a sense of maybe what you're seeing internally as far as, are folks occasionally in the office or how you might think about what you're thinking about between now and the end of the year or what that model might look like?

CRA went virtual in March of 2020, and from that period of March of 2020 until the date of this call, the vast majority of my colleagues, I would say, 90% or more have still been operating in a virtual basis. People will come occasionally to the office, either to meet with some colleagues, to have a meeting, but it's more for that interaction than anything that they're making their way in. We are hopeful but who knows with the volatility that we're seeing in the battle against the COVID virus. We are hopeful to return in a phased approach in the fall, but we're also not going to take any measures to put our family at risk by coming back prematurely. So, the hope is the fall, but the implementation will, of course, be different by geography, not just internationally, of course, but also by geography across the US. And thanks, again, to everyone for joining us today. We appreciate your time and interest in CRA. We'll be participating in a number of virtual meeting with investors in the coming months, and we look forward to updating you on our progress on the next earnings call. Until then, please, everyone, be safe, stay healthy. This concludes today's call. Thank you.

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