CRA International, Inc. — FY2016 Form 10-K
Period clarification: The filing is for the fiscal year ended December 31, 2016 (52 weeks), with comparison to fiscal 2015 (also 52 weeks). This differs from the “2015 Q4” period in the request metadata.
Business context
CRA provides economic, financial, litigation and regulatory, and management consulting services. Revenue is primarily generated from consultants’ billable hours and rates; fixed-price engagements represented 17% of fiscal 2016 revenue. No client accounted for more than 5% of revenue. The company sold substantially all of its GNU software subsidiary’s business assets in April 2016 and thereafter reported one operating segment, consulting services.
Financial results and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $324.8 million | $303.6 million |
| Gross profit / margin | $97.4 million / 30.0% | $95.9 million / 31.6% |
| Operating income / margin | $18.9 million / 5.8% | $12.4 million / 4.0% |
| Net income attributable to CRA | $12.9 million | $7.7 million |
| Diluted EPS | $1.49 | $0.83 |
| Cash from operations | $48.2 million | $20.4 million |
- Revenue increased 7.0%, principally from higher average consulting headcount; utilization remained 74%. Costs of services rose faster than revenue, taking gross margin down 1.6 percentage points, while lower SG&A reduced that pressure.
- FY2016 pretax income included a $3.8 million gain on the GNU asset sale. CRA’s share of the gain was reported as $2.1 million. FY2015 included a $4.5 million GNU goodwill impairment and a $0.6 million debt-extinguishment gain.
- Cash and cash equivalents were $53.5 million at year-end, up $15.4 million. Working capital was $76.4 million; days sales outstanding improved to 102 from 105.
- Investing activities used $11.9 million, primarily for office and technology expenditures. Financing activities used $19.2 million, including $19.3 million of share repurchases and $1.2 million of dividends.
- No borrowings were outstanding under the $125 million revolving facility; approximately $122.8 million was available after letters of credit. The facility matures April 24, 2018 and is subject to financial covenants. The balance sheet reported no long-term debt.
Material changes, outlook, and risks
- Consultant headcount growth drove revenue gains, but higher employee compensation and benefits increased service costs. International revenue rose to approximately 22% of total from 20%; fixed-price revenue rose to 17% from 14%.
- GNU’s operations ceased following the April 2016 asset sale. The sale generated a reported gain, while the remaining contingent $0.25 million purchase consideration was subject to conditions.
- Management stated that cash, operating cash flow, and credit availability were expected to fund anticipated needs for at least 12 months. No specific revenue or earnings guidance was provided. Regular quarterly dividends and further repurchases were anticipated but remained discretionary.
- A January 2017 acquisition of C1 Consulting added 86 colleagues and offices; consideration included cash and CRA shares, with possible additional milestone-based payments. The purchase accounting was not final in the filing.
- Significant control issue: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end, citing material weaknesses in revenue and related reserves, compensation, and certain non-routine technical accounting processes. The auditor issued an adverse opinion on internal controls, while issuing an unqualified opinion on the financial statements. Management described remediation actions, but effectiveness had not yet been established.
- Other key exposures include reliance on retaining and recruiting consultants and outside experts, utilization and bill rates, project-based revenue variability, fixed-price cost overruns, client collections, cybersecurity/confidentiality, foreign exchange, and professional liability. Operating lease commitments totaled $96.9 million. CRA reported no material pending legal proceeding; ordinary-course claims were not expected by management to materially affect results.
Important facts for investors to verify
- Progress and independent validation of remediation of the disclosed material weaknesses, especially revenue recognition/reserves and compensation estimates.
- Underlying operating performance excluding the GNU sale gain, and the sustainability of the higher FY2016 earnings and cash flow.
- Consultant utilization, headcount, compensation costs, and gross-margin trend after the 2016 margin decline.
- Integration, purchase accounting, and contingent consideration for the C1 acquisition, plus the status of GNU’s remaining contingent proceeds and wind-down.
- Cash conversion and receivables quality, including the increase in billed receivables and the adequacy of allowances.
- Capital allocation commitments—repurchases, dividends, lease obligations—and the revolving facility’s 2018 maturity and covenant terms.