CRA International, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011 (52 weeks). CRA changed its fiscal year-end; FY2010 also comprised 52 weeks but ended November 27, 2010. FY2011 fourth quarter was 13 weeks, versus 12 weeks in FY2010, so quarter comparisons are not like-for-like.
Business context
CRA is a global consulting firm focused on litigation, regulatory and financial consulting, and management consulting. Those activities represented about 98% of FY2011 revenue; its NeuCo software subsidiary contributed the remainder. The firm had 521 employee consultants and 21 offices at year-end.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $305.2 million | $287.4 million |
| Gross profit / margin | $105.8 million / 34.7% | $90.3 million / 31.4% |
| Operating income / margin | $29.1 million / 9.5% | $10.4 million / 3.6% |
| Net income attributable to CRA | $16.9 million | $2.6 million |
| Diluted EPS | $1.57 | $0.24 |
| Cash from operations | $30.0 million | $13.6 million |
FY2011 revenue rose 6.2%. Utilization increased to 74% from 67%. Fourth-quarter FY2011 revenue was $75.0 million, operating income $8.0 million, CRA-attributable net income $4.4 million, and diluted EPS $0.42.
At December 31, 2011, CRA reported cash and cash equivalents of $61.6 million, short-term investments of $14.5 million, working capital of $107.7 million, total assets of $372.1 million, and shareholders’ equity of $268.4 million. Cash declined $25.9 million during FY2011. Investing activities used $23.5 million, including $8.2 million in capital expenditures; financing activities used $31.8 million, including $21.9 million to retire the remaining convertible debentures and $9.1 million for share repurchases.
There were no borrowings on the $60 million revolving credit facility at year-end; $0.7 million of letters of credit reduced availability. The facility matures April 30, 2014, and CRA reported covenant compliance. Balance-sheet notes payable were $2.3 million in total, including $0.65 million current and $1.63 million long-term.
Material changes and unusual items
- Profitability improved substantially as revenue increased and utilization rose; cost of services fell to 65.3% of revenue from 68.6%, while SG&A declined to 23.5% from 25.7%.
- Interest expense fell to $0.9 million from $3.4 million, primarily following repayment of the convertible debt in June 2011.
- The effective tax rate was 39.7%, down from 68.6%. Improved foreign profitability supported release of approximately $1.7 million in valuation allowances, contributing to the year’s tax result.
- CRA recorded $1.0 million of FY2011 restructuring expense related to its former Houston office lease; FY2010 included $8.6 million of restructuring charges, principally workforce and office reductions.
- Goodwill was $140.7 million. The annual impairment test found no impairment; estimated fair value exceeded carrying value by about 25% at the test date.
Outlook, commentary and risks
Management said demand improved, with a steady stream of engagements, consistent lead flow, healthy project conversion, and growth in both management and litigation consulting. It remained cautious about client spending amid economic uncertainty and political and regulatory instability. The filing gives no quantified revenue or earnings guidance and states that actual outcomes may differ materially from forward-looking statements.
Principal risks include reliance on key consultants and a small number of large engagements; project cancellations and utilization swings; competition and hiring pressures; economic conditions and M&A activity; fixed-price project cost overruns; client collection risk; international and currency exposure; and professional-liability, goodwill-impairment, and tax risks. The top 10 engagements generated about 14% of FY2011 revenue, while the top 10 clients generated about 23%; no single client exceeded 5%.
Other commitments include $64.0 million of operating lease obligations before expected sublease receipts, a performance-based acquisition-related award estimated at $9.6 million and payable subject to performance and retention conditions, and $3.7 million of remaining restructuring liabilities. The IRS had begun examining the FY2009 federal return and UK authorities had begun reviewing the subsidiary’s FY2009 return; no material adjustments had been proposed, and outcomes were not predictable. Management and KPMG reported effective internal control over financial reporting; KPMG gave an unqualified opinion on the financial statements.
Investor verification priorities
- Assess whether FY2011’s stronger utilization, revenue growth, and margins persisted, accounting for the shorter FY2010 fourth quarter.
- Review the sustainability of earnings and cash generation, including the $1.7 million tax valuation-allowance release and bonus accruals of about $42 million, most of which was expected to be paid in FY2012’s first quarter.
- Track collections and working-capital quality: year-end DSO was 96 days, and accounts receivable allowances were $6.5 million.
- Monitor consultant retention, client and engagement concentration, fixed-price project execution, and NeuCo’s performance.
- Check future repurchases, lease and restructuring payments, the contingent acquisition award, and compliance with credit-facility covenants.