CRA International, Inc. — Form 10-Q Summary
Period clarification: The filing is for the quarter ended September 30, 2017, not 2016 Q3 as indicated in the request metadata. Comparisons are with the quarter ended October 1, 2016; year-to-date (YTD) comparisons cover the respective first three fiscal quarters. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
CRA is a global consulting firm providing litigation, regulatory and financial consulting, and management consulting services. It reports one operating segment. The quarter’s results include C1 Consulting, acquired January 30, 2017.
Financial performance
| Metric | Q3 2017 | Q3 2016 | YTD 2017 | YTD 2016 |
|---|---|---|---|---|
| Revenue | $91.3 | $81.7 | $273.1 | $245.2 |
| Operating income | $5.6 | $5.3 | $16.4 | $15.3 |
| Operating margin | 6.2% | 6.5% | 6.0% | 6.2% |
| Net income attributable to CRA | $3.2 | $3.2 | $9.9 | $10.8 |
| Diluted EPS | $0.38 | $0.38 | $1.15 | $1.24 |
| Operating cash flow | Not separately provided for quarter | $7.8 | $16.2 |
- Q3 revenue rose 11.8%; management cited growth in business consulting, increased consultant headcount and C1. Utilization improved to 74% from 73%, while consultant headcount increased by 98 year over year, including 84 consultants from C1.
- Q3 costs of services were 68.4% of revenue, down from 70.8%; SG&A rose to 22.8% from 20.4%. The resulting operating margin declined to 6.2% from 6.5%.
- YTD revenue increased 11.4%, but CRA-attributable net income declined 8.8% and diluted EPS fell from $1.24 to $1.15. YTD operating cash flow was less than half the prior-year amount.
- YTD results included a $0.25 million GNU asset-sale gain in 2017 versus $3.84 million in 2016, contributing to the lower year-over-year pretax income comparison. The prior-year gain also affected the noncontrolling-interest allocation.
Balance sheet, liquidity and debt
- At September 30, 2017, cash and cash equivalents were $20.9 million, down from $53.5 million at December 31, 2016; working capital was $60.6 million. Accounts receivable were $76.8 million and unbilled services were $41.5 million.
- CRA had no borrowings outstanding under its $125 million revolving facility; $3.6 million of letters of credit reduced availability. The company reported compliance with facility covenants. On October 24, after quarter-end, CRA extended the facility for five years.
- Cash declined by $32.6 million YTD. Uses included $16.2 million for the C1 acquisition, $19.5 million for share repurchases, $3.5 million in dividends, and capital expenditures. Operating cash flow was pressured by higher receivables and unbilled services.
- CRA stated that cash, operating cash flow and available credit were expected to cover anticipated needs for at least 12 months, while noting that acquisitions, changes in business plans or unexpected spending could increase funding needs.
Management commentary, outlook and notable items
- No specific revenue, earnings or margin guidance is provided. Management said it expected to continue share repurchases and anticipated regular quarterly dividends, subject to board discretion. A $0.17 per-share dividend was declared after quarter-end, payable December 15, 2017.
- C1’s preliminary acquisition accounting included $12.6 million of goodwill, $8.8 million of intangible assets and $2.4 million of contingent consideration. The contingent consideration liability was $3.4 million at quarter-end and is remeasured each reporting period.
- YTD intangible-asset impairment was $0.5 million. The YTD effective tax rate increased to 38.0% from 34.3%, reflecting the prior-year nonrecurring benefit, executive compensation and unfavorable discrete items, partly offset by specified tax benefits.
- Disclosure controls and procedures were deemed ineffective at September 30, 2017 because of material weaknesses involving revenue and related reserves, compensation processes and certain non-routine technical accounting. Management reported remediation efforts underway and said the financial statements fairly present results in all material respects.
- Management cited estimation uncertainty in receivable and unbilled-service allowances, fixed-price revenue recognition, compensation, taxes, and acquired asset valuations. It reported no material change in previously disclosed risk factors; the filing’s legal-proceedings item states “None.”
Important facts for investors to verify
- Whether remediation of the disclosed material weaknesses is completed and independently validated.
- Collection trends and reserve adequacy, given the rise in receivables, unbilled services and related allowances, alongside lower operating cash flow.
- How C1 performs against expectations and how contingent consideration is remeasured or paid.
- Whether utilization, staffing growth and higher fixed-price engagement mix support margins without further SG&A pressure.
- Cash allocation and liquidity after acquisition spending, repurchases, dividends and planned office commitments.
- The impact of the higher YTD tax rate and the adoption of new accounting standards, particularly the expected 2018 revenue-recognition change.