CRA International, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 29, 2018 (52 weeks), with comparisons to fiscal 2017 (52 weeks). The request metadata says “2017 Q4,” but the supplied filing is for fiscal 2018; fiscal fourth-quarter results are noted separately below. Unless stated otherwise, financial amounts are in U.S. dollars.
Business context and reporting period
CRA provides economic, financial, litigation and regulatory, and management consulting services through employee consultants and outside experts. It operates as one business segment. Revenue is primarily driven by consultant headcount, billing rates, and billable hours; utilization was 76% in fiscal 2018, versus 74% in fiscal 2017. No client represented more than 5% of revenue in either year.
Key financial metrics
| Metric | FY 2018 | FY 2017 | Change / context |
|---|---|---|---|
| Revenue | $417.6 million | $370.1 million | Up 12.8% |
| Income from operations | $28.9 million | $15.8 million | Operating margin 6.9%, versus 4.3% |
| Net income attributable to CRA | $22.5 million | $7.6 million | Up $14.9 million |
| Diluted earnings per share | $2.61 | $0.89 | Up from prior year |
| Operating cash flow | $36.2 million | $45.9 million | Down $9.7 million |
| Capital expenditures | $15.4 million | $9.8 million | Primarily property and equipment |
| Cash and cash equivalents, year-end | $38.0 million | $54.0 million | Down $16.0 million |
| Working capital, year-end | $38.6 million | $62.3 million | Down $23.7 million |
| Revolving credit facility | $125.0 million | $125.0 million | No borrowings at year-end; $3.9 million of letters of credit outstanding |
Cost of services was 69.2% of revenue, compared with 69.9%; selling, general and administrative expenses were 21.5%, compared with 23.4%. Net margin attributable to CRA was approximately 5.4%, versus 2.1%. The company generated $35.7 million of net cash outflow from financing activities, including $27.9 million of share repurchases and $5.8 million of dividends.
In fiscal Q4 2018, revenue was $108.8 million and income from operations was $7.8 million. In fiscal Q4 2017, revenue was $97.0 million and the company recorded an operating loss of $0.6 million, including a $5.7 million IQVIA settlement charge during that quarter.
Material changes versus the prior comparable period
- Revenue growth reflected 9.1% more billable hours, utilization rising to 76%, and an increase of 56 consultants during fiscal 2018. Foreign-exchange movements increased revenue by $2.6 million in 2018; the prior-year effect was a $2.5 million decrease.
- Consultant compensation and benefits, incentive and retention compensation, forgivable-loan amortization, and reimbursable client expenses increased. Despite higher costs in dollars, cost of services declined as a share of revenue.
- SG&A rose 3.5% in dollars but declined as a share of revenue. The comparison benefited from the absence of the $5.7 million IQVIA payment recorded in 2017.
- The effective tax rate fell to 22.3% from 49.2%. Fiscal 2017 included a $3.6 million tax provision from remeasuring deferred tax balances following U.S. tax reform; fiscal 2018 also included tax adjustments related to the law.
- CRA adopted ASC 606 using the modified retrospective method. The opening retained-earnings adjustment was $0.4 million, net of tax; the company said 2018 reported amounts were not materially different from the amounts that would have been recognized under prior revenue guidance. Prior-year figures were not restated.
Outlook, management commentary, risks and unusual items
- Outlook and liquidity: Management said cash, operating cash flow, and available revolving credit should fund anticipated working-capital and capital needs for at least 12 months. It anticipated regular quarterly dividends and expected to continue repurchases, subject to Board discretion and business needs. The filing provides no specific revenue or earnings guidance.
- Capital returns: Fiscal 2018 dividends were $0.71 per share. The Board authorized an additional $20 million share-repurchase authorization in February 2019; approximately $21.6 million was available under the program as of February 22, 2019.
- Internal controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end because of material weaknesses involving contingent consideration and incentive compensation, revenue and related reserves, certain accounts payable and accruals, and technical tax matters. Ernst & Young issued an adverse opinion on internal control, while giving an unqualified opinion on the financial statements. CRA described remediation steps and additional planned work for 2019.
- Lease commitments: Operating lease commitments totaled $126.0 million at year-end. On adopting ASC 842 in fiscal 2019, CRA estimated it would record right-of-use assets of $66 million to $86 million and lease liabilities of $89 million to $112 million; final amounts could vary.
- Other exposures: Risks include consultant retention and utilization, project and fixed-price execution, client payment and engagement termination, competition, cybersecurity and privacy, foreign exchange, and regulatory or economic changes. UK operations generated approximately 16% of revenue in 2018, and Brexit-related uncertainty was identified as a risk. A hypothetical 10% foreign-exchange movement would have affected fourth-quarter pretax income by approximately $2.9 million, all else equal.
- Contingencies and unusual items: The company reported no material pending legal proceedings in Item 3; it also disclosed ordinary-course legal actions and did not expect them to materially affect financial position or results. GNU was dissolved in 2017 and liquidated in 2018; CRA recorded a $0.3 million liquidation gain in 2018. Goodwill impairment was nil in 2018.
Most important facts for investors to verify
- Progress and effectiveness of remediation of the material weaknesses, especially controls over revenue, reserves, compensation estimates, and tax matters.
- Whether 2018 revenue growth and improved operating margin are sustained, given the business’s dependence on billable hours, utilization, consultant hiring and retention, and large project timing.
- Cash conversion and working-capital trends, including receivables, unbilled services, and the increased balance of forgivable loans.
- Final lease assets and liabilities recorded under ASC 842 and the implications for reported balance-sheet leverage and future disclosures.
- Future use of cash for dividends and repurchases relative to hiring, capital expenditures, and potential acquisitions; also confirm covenant headroom if borrowing increases.