CRA International, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and year-to-date period ended June 30, 2018, compared with periods ended July 1, 2017. The request metadata says “2017 Q2,” but the filing itself is for 2018 Q2.
Business context and results
CRA provides litigation, regulatory and financial consulting, and management consulting services. It reports one business segment. Amounts below are in millions of dollars except per-share data.
- Quarter revenue: $105.5, up 12.7% from $93.6. Operating income was $9.7 versus $5.8; net income attributable to CRA was $6.8 versus $3.8. Diluted EPS rose to $0.79 from $0.44.
- First-half revenue: $205.0, up 12.8% from $181.7. Operating income was $15.9 versus $10.8; net income attributable to CRA was $11.7 versus $6.7. Diluted EPS rose to $1.35 from $0.77.
- Margins: Operating margin improved to 9.2% from 6.3% for the quarter and to 7.7% from 5.9% year to date. Net margin attributable to CRA was 6.5% versus 4.1% for the quarter and 5.7% versus 3.7% year to date.
- Revenue mix and activity: Quarterly time-and-materials revenue increased to $84.9 from $65.4, while fixed-price revenue declined to $20.7 from $28.2. Utilization rose to 79% from 76%; billable hours increased 9.9%, and consultant headcount was 628 versus 600 a year earlier.
Cash flow, balance sheet and capital
- Cash flow: First-half operating cash flow was negative $32.8, compared with negative $8.5 in the prior-year period. Investing cash flow was negative $8.9, primarily from capital expenditures; financing cash flow was negative $2.8. Cash declined $45.0 to $9.0.
- Liquidity: Working capital was $36.6. Current assets were $153.5 and current liabilities $117.0. Management said cash, operating cash generation and the credit facility should fund anticipated needs for at least 12 months.
- Debt: Revolver borrowings were $20.8 at June 30, 2018, against a $125.0 facility; $3.9 of letters of credit reduced availability. Borrowings were in compliance with covenants. After quarter-end repayments in July, $10.0 remained outstanding in the U.S.
- Shareholder returns: CRA repurchased 378,477 shares for $20.4 during the first half and paid $2.8 in dividends. Approximately $9.1 remained available under repurchase authorizations. A $0.17-per-share dividend was declared after quarter-end.
Changes, outlook and risks
- Revenue growth and improved operating margins were partly offset by higher SG&A: $23.7 for the quarter, up 16.7%, and $45.4 year to date, up 16.4%. Costs of services declined as a share of revenue, while SG&A rose as a share of revenue.
- Management attributed negative operating cash flow primarily to payment of a significant portion of prior-year performance bonuses, increases in receivables and unbilled services, and $12.1 of net forgivable-loan investment. Capital spending and share repurchases also reduced cash.
- The effective tax rate fell to 29.8% for the quarter and 25.1% year to date, from 34.0% and 36.0%, respectively. Tax Act accounting remained incomplete; CRA recorded a $0.3 adjustment to provisional tax amounts during the first half, and further changes could affect tax expense.
- CRA adopted ASC 606 using the modified retrospective method, increasing opening retained earnings by $0.4 net of tax. Prior-year figures were not restated; the company said reported revenue was not materially different from the amount under the prior standard.
- Management anticipated continued share repurchases and regular quarterly dividends, subject to board discretion. No specific revenue or earnings guidance was provided. The company identified leasing, hiring, compensation, acquisitions and capital spending as future funding needs.
- Controls: Disclosure controls were deemed ineffective at June 30 due to material weaknesses involving non-routine technical accounting and IT general controls, including program changes to accounting software. The weaknesses also prevented remediation of previously identified revenue/reserve and compensation-control weaknesses. Management nevertheless stated the financial statements fairly present results in all material respects and described remediation efforts.
- Other matters: CRA reported no material change in previously disclosed risk factors and no legal proceedings considered material. No intangible-asset impairment was recorded in Q2 2018, compared with $0.5 in Q2 2017. New Boston office leases add space and future rent commitments; adoption of lease accounting was expected to materially increase reported assets and liabilities.
Important facts for investors to verify
- Confirm the reporting-period mismatch: the filing covers Q2 2018, not Q2 2017.
- Assess whether revenue growth, utilization and billable-hour gains are sustainable, and monitor the shift toward time-and-materials work.
- Track operating cash conversion, receivables, unbilled services, forgivable-loan advances and cash levels after the July debt repayments.
- Review progress in remediating the disclosed material weaknesses, particularly IT change controls and revenue, reserve and compensation processes.
- Monitor Tax Act accounting estimates, contingent-consideration remeasurement, and the balance-sheet and expense effects of the new lease standard.