CRA International, Inc. — Form 10-Q summary
Reporting-period note: The request metadata says 2019 Q3, but the supplied filing is for the fiscal quarter ended September 26, 2020, with comparisons to the quarter ended September 28, 2019.
Business context and period
CRA is a global consulting firm focused on litigation, regulatory and financial consulting, and management consulting. It reports one business segment. This unaudited 10-Q covers the third fiscal quarter and year-to-date periods ended September 26, 2020.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Year to date 2020 | Year to date 2019 |
|---|---|---|---|---|
| Revenue | $121.8 million | $115.7 million | $371.0 million | $332.1 million |
| Operating income | $8.0 million | $6.9 million | $24.5 million | $22.1 million |
| Net income | $5.4 million | $5.7 million | $17.8 million | $16.0 million |
| Diluted EPS | $0.68 | $0.71 | $2.23 | $1.94 |
| Operating margin | 6.6% | 6.0% | 6.6% | 6.6% |
| Net margin | 4.4% | 5.0% | 4.8% | 4.8% |
- Q3 revenue rose 5.3% and operating income rose 16.2%, but net income declined 5.9%; the higher tax provision contributed to the net-income decline. Year-to-date revenue increased 11.7%, net income 11.4%, and diluted EPS 14.9%.
- Costs of services were 72.5% of revenue in Q3 versus 72.4% a year earlier, and 72.6% year to date versus 70.3%. SG&A was 18.2% of Q3 revenue versus 19.4%, and 18.3% year to date versus 20.8%.
- Cash and equivalents were $24.1 million at quarter-end, down $1.5 million from fiscal year-end. Year-to-date operating cash flow was negative $10.7 million, compared with negative $19.9 million in the prior-year period; capital expenditures were $15.7 million.
- Debt included $38.0 million drawn on the $125 million revolving facility; $4.7 million of letters of credit reduced remaining availability to $82.3 million. CRA reported compliance with covenants. Current liabilities exceeded current assets by $0.5 million.
- Total assets were $550.2 million and shareholders’ equity was $204.4 million. Lease liabilities totaled $155.9 million. The $13.5 million contingent consideration liability related to the C1 acquisition was due before the end of Q2 fiscal 2021.
Material changes and management commentary
- Consultant headcount increased 11.5%, from 741 to 826, while utilization declined from 76% to 69%. Management attributed the utilization decline primarily to the larger workforce.
- Year-to-date service costs rose 15.4%, faster than revenue, reflecting higher employee compensation, incentive and retention compensation, forgivable-loan amortization, and reimbursable expenses. Lower travel and entertainment helped reduce SG&A.
- Management said COVID-19 had not materially adversely affected results through the reported period, but warned that client demand, project timing and originations, operations, and liquidity could be affected. It said the impact and duration were uncertain and that interim results might not indicate full-year results.
- Management believed cash, operating cash flow, and available facility capacity would fund operating needs for at least 12 months. This assessment excludes unforeseen significant changes and potential acquisitions.
- The board declared a $0.26-per-share dividend on October 29, 2020, payable December 11, 2020. CRA paid $5.4 million of dividends and repurchased $8.8 million of shares year to date; approximately $14.7 million remained authorized for repurchases.
- Legal proceedings were described as ordinary-course matters; management did not expect pending actions to materially affect financial position or results, while noting outcomes are uncertain.
Risks, contingencies, and unusual items
- Disclosure controls and procedures were deemed ineffective at September 26, 2020 because of material weaknesses involving incentive-compensation liabilities, certain revenue and related-account controls, and completeness of certain accounts payable and expense accruals. Management stated the financial statements fairly present results and that remediation was ongoing.
- The Q3 effective tax rate was 28.2%, versus 14.2% a year earlier; the year-to-date rate was 27.5%, versus 22.9%. The filing attributes the increase primarily to deferred-tax remeasurement using expected 2020 state apportionment and the absence of prior-year tax-reserve releases.
- Year-to-date cash use reflects, among other factors, payment of a significant portion of fiscal 2019 performance bonuses, increased unbilled services, forgivable-loan funding, and office build-outs. Forgivable loans totaled $64.2 million, including $58.1 million non-current.
- Adoption of the expected-credit-loss standard reduced opening retained earnings by $0.2 million. No material effect on current-period results or cash flows was reported.
Important facts for investors to verify
- Confirm the reporting-period mismatch: the supplied filing is Q3 2020, not Q3 2019.
- Track whether utilization improves as consultant headcount grows and whether service costs remain elevated relative to revenue.
- Monitor operating cash flow, collections and unbilled services, and the timing of bonus payments and capital spending.
- Review the repayment of the $38.0 million revolver balance and the $13.5 million contingent-consideration payment due in fiscal 2021, alongside covenant compliance.
- Follow remediation of the disclosed material weaknesses and any subsequent changes to control effectiveness.
- Assess COVID-19 effects on demand, project timing, and the company’s ability to sustain dividends and repurchases.