CRA International, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter ended October 3, 2015, with year-to-date results compared with the corresponding 2014 periods. The filing metadata says “2014 Q3,” but the 10-Q itself is for Q3 fiscal 2015. CRA provides consulting services in litigation, regulatory and financial matters, and management consulting.
Financial results
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2015 | Q3 2014 | FYTD 2015 | FYTD 2014 |
|---|---|---|---|---|
| Revenue | $76.5 | $73.5 | $231.1 | $227.9 |
| Gross profit / margin | $24.5 / 32.0% | $24.1 / 32.8% | $74.6 / 32.3% | $74.0 / 32.5% |
| Operating income / margin | $4.6 / 6.0% | $5.8 / 7.9% | $14.7 / 6.4% | $17.9 / 7.9% |
| Net income attributable to CRA | $2.9 | $3.2 | $9.0 | $9.8 |
| Diluted EPS | $0.31 | $0.33 | $0.97 | $0.98 |
| Operating cash flow | Not reported quarterly | Not reported quarterly | $(4.9) | $10.8 |
- Q3 revenue increased 4.1%; FYTD revenue increased 1.4%. Revenue growth did not translate into higher profits: Q3 operating income fell about 21% and CRA-attributable net income fell about 11% year over year.
- Costs of services rose to 68.0% of Q3 revenue from 67.2%; SG&A rose to 24.0% from 22.7%. FYTD operating margin declined to 6.4% from 7.9%.
- Utilization decreased to 73% in Q3 from 75%, and to 75% FYTD from 77%, as new hires were onboarded. Headcount at Q3-end rose to 507 from 449 a year earlier.
- At October 3, cash was $21.0 million, down from $48.2 million at fiscal year-end; working capital was $77.3 million. Current assets were $153.3 million and current liabilities $75.9 million.
- FYTD investing cash use was $11.2 million, including $12.7 million of capital expenditures, principally for Boston and Washington office build-outs. Financing cash use was $10.5 million, primarily including $10.8 million of share repurchases.
- CRA had no borrowings under its $125 million revolving credit facility; approximately $122.5 million remained available after letters of credit. The facility matures April 24, 2018. CRA reported compliance with its covenants.
Changes, outlook, and notable items
- Management attributed higher costs to headcount growth, commissions to nonemployee experts, recruiting and other operating costs, and temporary overlapping rent while new offices were fitted out. Boston’s additional rent ended in Q3; New York City’s was expected to continue into Q1 2016.
- DSO increased to 109 days from 99 days at fiscal year-end. Management cited bonus payments, higher unbilled services and receivables, and related working-capital movements among the factors behind negative FYTD operating cash flow.
- Management stated that cash, operating cash generation, and the credit facility should be sufficient for anticipated needs for at least the next 12 months. It expected to continue discretionary share repurchases; approximately $10.1 million remained authorized. No specific revenue or earnings guidance was provided.
- FYTD results included a $0.6 million gain on extinguishment of NeuCo debt: a roughly $0.981 million note was settled for $0.375 million. A $0.8 million charge to costs of services reflected an increased estimated contingent acquisition liability, which stood at $0.9 million at quarter-end.
- The FYTD effective tax rate was 38.0%, versus 44.1% a year earlier; Q3 rates were 35.3% and 42.8%, respectively. The current-period rate benefited from geographic earnings mix, valuation allowances, and discrete tax items. The prior-year FYTD comparison included a $0.8 million noncash tax expense to correct an immaterial prior-period error.
- Disclosure controls and procedures were deemed ineffective at quarter-end because of an ongoing material weakness in accounting and reporting for non-routine compensation arrangements, including share-based compensation. Management nevertheless concluded the financial statements fairly presented the company’s financial position and results.
- Other stated risks include consultant hiring and retention, utilization and billing rates, engagement timing and client collection, foreign currency exposure, acquisitions, and reliance on key employees and nonemployee experts. A hypothetical 10% foreign-exchange move was estimated to affect Q3 pretax income by about $1.0 million. Legal proceedings: none reported.
Investor facts to verify
- Whether utilization and staffing growth improve without further pressure on margins.
- Whether DSO, unbilled services, and operating cash flow recover after the bonus-payment and office-investment outflows.
- The progress and cost of New York office relocation, and the end of temporary rent overlap.
- Remediation of the material weakness in controls over non-routine compensation arrangements.
- The assumptions behind the contingent acquisition liability and the remaining NeuCo settlement payment.
- Future share repurchase pace, cash needs, and continued covenant compliance.