CRA International, Inc. — Form 10-Q Summary
Period discrepancy: The request identifies 2017 Q3, but the supplied filing is for the quarter ended September 29, 2018 (fiscal 2018 Q3), compared with the quarter ended September 30, 2017. Year-to-date figures cover the corresponding periods.
Business context and reporting period
CRA provides litigation, regulatory, financial, and management consulting services and reports as one business segment. The filing’s financial statements are unaudited. Fiscal 2018 results reflect adoption of ASC 606; 2017 comparative results were not retrospectively adjusted.
Financial performance and liquidity
| Metric | Fiscal Q3 2018 | Fiscal Q3 2017 | Year to date 2018 | Year to date 2017 |
|---|---|---|---|---|
| Revenue | $103.9 million | $91.3 million | $308.9 million | $273.1 million |
| Operating income | $5.2 million | $5.6 million | $21.1 million | $16.4 million |
| Operating margin | 5.0% | 6.2% | 6.8% | 6.0% |
| Net income attributable to CRA | $3.9 million | $3.2 million | $15.6 million | $9.9 million |
| Diluted EPS | $0.46 | $0.38 | $1.81 | $1.15 |
- Quarterly revenue rose 13.8% year over year; year-to-date revenue rose 13.1%. Management cited higher utilization, consultant headcount, and billable hours. Q3 utilization was 76% versus 74%, consultant headcount was 685 versus 639, and billable hours increased 7.4%.
- Quarterly operating income declined despite revenue growth, as costs of services increased 18.1%; costs of services were 71.0% of revenue versus 68.4%. For year to date, costs of services fell to 68.9% of revenue from 69.7%.
- Quarterly effective tax rate was 20.9% versus 41.7%; year-to-date rate was 24.1% versus 38.0%. The lower 2018 rates primarily reflected the reduced U.S. corporate tax rate and stock-compensation tax benefits, partly offset by Tax Act-related nondeductible items.
- Year-to-date operating cash flow was negative $8.4 million, versus positive $7.8 million in 2017. Uses included increases in receivables and unbilled services, $14.7 million in forgivable-loan activity, and payment of prior-year performance bonuses. Capital expenditures were $13.4 million.
- Cash and cash equivalents were $11.9 million at September 29, down $42.2 million from fiscal year-end; working capital was $43.6 million. The company attributed the cash reduction principally to bonus payments, share repurchases, forgivable loans, and office buildouts.
- At quarter-end, revolving-credit borrowings were $5.0 million; CRA repaid them in October 2018. The facility is $125 million, with $3.9 million of letters of credit reducing availability. CRA reported compliance with its covenants.
Material changes, outlook, and risks
- Quarterly net income increased 21.6%; year-to-date net income increased 58% approximately. Year-to-date diluted EPS rose to $1.81 from $1.15.
- Quarterly SG&A was $22.3 million, or 21.5% of revenue, versus $20.8 million, or 22.8%. Year-to-date SG&A was $67.7 million, or 21.9% of revenue, versus $59.8 million, or 21.9% (management’s narrative also cites 22.0% for 2018).
- Management said cash, operating cash generation, and credit availability should fund anticipated working capital and capital expenditures for at least 12 months. It provided no specific revenue or earnings guidance and said it expects to continue share repurchases and regular quarterly dividends, subject to board discretion.
- The board declared a $0.20-per-share quarterly dividend on November 1, 2018, payable December 21, 2018. CRA repurchased 378,477 shares year to date at an average $53.90; approximately $9.1 million remained authorized. No shares were repurchased in Q3.
- CRA expects adoption of lease accounting rules to materially increase reported assets and liabilities. It disclosed $134.0 million of operating lease payments contractually due at December 30, 2017; the eventual balance-sheet impact had not been quantified.
- Disclosure controls were not effective at quarter-end due to material weaknesses involving non-routine technical accounting controls and IT general controls over accounting-software program changes. Weaknesses affecting revenue/reserve and compensation processes also remained unremediated. Management said the statements fairly present results, and described ongoing remediation efforts.
- Other considerations include higher contingent consideration tied to acquisition estimates, a $5.6 million Level 3 contingent-consideration liability, increased credit-loss expense, and management’s estimates for revenue recognition and variable consideration. CRA said pending legal matters were not expected to materially affect results. No material change to previously disclosed risk factors was reported.
Most important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is fiscal 2018 Q3, not 2017 Q3.
- Assess whether revenue growth can translate into improved operating margins given Q3 cost-of-services growth and incentive/retention compensation costs.
- Monitor operating cash conversion, receivables and unbilled services, and the growth and cash requirements of forgivable loans.
- Track remediation and independent validation of the disclosed material weaknesses in financial reporting controls.
- Verify the realized lease-accounting balance-sheet impact and the company’s capacity to fund dividends, buybacks, and office commitments.