CRA International, Inc. — Form 10-Q Summary
Period discrepancy: The request metadata says “2018 Q3,” but the filing covers the fiscal quarter ended September 28, 2019, with comparisons to the quarter ended September 29, 2018. Amounts below are in millions of dollars unless stated otherwise.
Business context and reporting period
CRA is a global consulting firm focused on litigation, regulatory and financial consulting, and management consulting. It reports one business segment. The filing presents third-quarter and year-to-date results through September 28, 2019.
Financial results and key metrics
| Metric | Fiscal Q3 2019 | Fiscal Q3 2018 | Year to date 2019 | Year to date 2018 |
|---|---|---|---|---|
| Revenue | $115.7 | $103.9 | $332.1 | $308.9 |
| Operating income | $6.9 | $5.2 | $22.1 | $21.1 |
| Net income | $5.7 | $3.9 | $16.0 | $15.6 |
| Diluted EPS | $0.71 | $0.46 | $1.94 | $1.81 |
| Operating margin | 6.0% | 5.0% | 6.6% | 6.8% |
| Net margin | 5.0% | 3.8% | 4.8% | 5.1% |
- Q3 revenue increased 11.4% year over year; year-to-date revenue increased 7.5%. Q3 consultant headcount rose 8.2% to 741, while utilization remained 76% in both comparable periods.
- Q3 cost of services rose 13.7% to $83.8 million, increasing to 72.4% of revenue from 71.0%. Year-to-date cost of services rose 9.7% to $233.4 million, or 70.3% of revenue versus 68.9%.
- Q3 SG&A was $22.4 million, approximately flat year over year; as a share of revenue it declined to 19.4% from 21.5%. Year-to-date SG&A increased 1.8% to $68.9 million but declined as a share of revenue to 20.8% from 21.9%.
- Q3 effective tax rate was 14.2% versus 20.9%; year-to-date rate was 22.9% versus 24.1%. Management attributed the reduction mainly to release of tax reserves following expiration of statutes of limitation, partly offset by lower share-based compensation tax benefits.
- Cash and cash equivalents were $19.8 million at September 28, 2019, down from $38.0 million at December 29, 2018. Working capital was $8.3 million.
- Year-to-date operating cash flow was negative $19.9 million versus negative $8.4 million in the comparable 2018 period. Investing cash outflow was $12.5 million, primarily capital expenditures for Boston and Cambridge office buildouts. Financing cash flow was positive $14.8 million.
- At quarter end, revolving-credit borrowings were $36.0 million under a $125.0 million facility; letters of credit of $4.4 million reduced availability. The company reported covenant compliance. It repaid $10.0 million in October, leaving $26.0 million outstanding.
Material changes and unusual items
- Q3 net income and diluted EPS increased, supported by higher revenue, lower SG&A as a percentage of revenue, and the lower tax rate. Year-to-date net income rose modestly, while operating and net margins were lower.
- Higher compensation and retention incentives, consultant-related costs, reimbursable expenses, and acquisition-related contingent consideration contributed to increased service costs. The year-to-date contingent consideration liability increased to $9.6 million from $6.2 million at year-end 2018.
- Cash usage reflected payment of prior-year performance bonuses, forgivable-loan funding, share repurchases, capital expenditures, and increases in unbilled services and other working-capital items. Year-to-date share repurchases totaled $18.1 million; cash dividends paid totaled $4.7 million.
- Adoption of lease accounting standard ASC 842 resulted in recognition of $111.0 million of right-of-use assets and $137.5 million of lease liabilities at quarter end. Management said adoption did not materially affect results or cash flows. Additional office leases not yet commenced carried minimum commitments of $28.8 million.
- Foreign-exchange movements reduced Q3 revenue by $1.1 million and year-to-date revenue by $3.8 million. Fixed-price engagements represented 26% of Q3 revenue, versus 24% a year earlier.
Outlook, risks and contingencies
- Management expects available cash, operating cash generation, and credit-facility availability to meet anticipated working-capital and capital-expenditure needs for at least 12 months. No specific revenue or earnings guidance is provided.
- The company anticipates regular quarterly dividends and expects to continue share repurchases, subject to Board discretion and available resources. Approximately $3.5 million remained available under the repurchase authorization at September 28, 2019. A subsequent quarterly dividend of $0.23 per share was declared October 31, 2019.
- Material weaknesses remained in controls over contingent consideration and incentive compensation, revenue and related reserves, certain accounts payable and expense accruals, and evaluation of certain tax matters. Management concluded disclosure controls were not effective at quarter end, while stating the filed financial statements fairly present results in all material respects; remediation efforts were ongoing.
- CRA is subject to legal actions arising in the ordinary course. Management did not expect pending matters to materially affect financial position or results, but noted outcomes are uncertain. The filing reports no material change in previously disclosed risk factors.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for Q3 2019, not Q3 2018.
- Track whether revenue growth translates into improved year-to-date operating margins, given rising service costs and incentive compensation.
- Monitor operating cash flow, unbilled services, forgivable-loan advances, and the timing of bonus payments.
- Review borrowings, lease obligations, facility availability, covenant headroom, and the effect of ongoing buybacks and dividends on liquidity.
- Assess remediation of the disclosed material weaknesses and any subsequent changes in control effectiveness.
- Consider the sustainability of the unusually low Q3 tax rate, which benefited from tax-reserve releases.