CRA International, Inc. — Form 10-Q Summary
Period: Fiscal quarter ended March 31, 2018, compared with the quarter ended April 1, 2017. The request metadata says “2017 Q1,” but the filing is for Q1 2018.
Business context and results
CRA provides litigation, regulatory, financial, and management consulting services and reports as one business segment. Unless otherwise noted, amounts below are in U.S. dollars.
| Metric | Q1 2018 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $99.5 million | $88.2 million | Up 12.8% |
| Operating income | $6.2 million | $4.9 million | Up 26.4% |
| Operating margin | 6.2% | 5.6% | Up 0.6 percentage points |
| Net income attributable to CRA | $4.9 million | $2.9 million | Up about $2.0 million |
| Diluted EPS | $0.57 | $0.33 | Up 72.7% |
| Net cash used in operations | $40.5 million | $20.4 million | Use increased |
Revenue increased alongside 6.8% growth in client service hours, utilization rising to 73% from 72%, and consultant headcount increasing to 647 from 627. Revenue outside the U.S. was about 23% of total, versus 18%; fixed-price work was 21%, versus 19%. Costs of services rose 10.9% but declined to 69.8% of revenue from 71.0%. SG&A rose 16.0% and increased to 21.8% of revenue from 21.2%.
Cash, balance sheet, and capital allocation
- Cash and cash equivalents were $10.9 million at March 31, down from $54.0 million at year-end. Working capital was $44.2 million.
- Operating cash outflow of $40.5 million primarily reflected $31.1 million of cash used by accounts payable, accrued expenses, and other liabilities, largely from paying fiscal 2017 performance bonuses; unbilled services also used $8.9 million. Forgivable-loan activity used $16.0 million of cash.
- Investing cash outflow was $3.2 million, principally capital expenditures. Financing cash flow was approximately neutral: $10.0 million of revolving-credit borrowings largely offset share repurchases, dividends, and employee tax withholding.
- Debt included $10.0 million drawn on a $125 million revolving facility; $3.6 million of letters of credit reduced availability. CRA reported compliance with covenants. It stated the facility requires leverage and interest-coverage ratios and is secured by stock of certain subsidiaries.
- Forgivable loans totaled $44.8 million, up from $28.6 million at year-end. CRA uses these loans to attract and retain employees and non-employee experts; forgiveness is generally conditional on continued service.
- CRA repurchased 162,892 shares at an average $51.13 and paid $1.4 million in dividends during the quarter. The board declared a $0.17-per-share dividend after quarter-end. April borrowings and repurchases further affected liquidity: CRA reported $13.0 million of U.S. and £5.0 million of U.K. borrowings, and repurchased 215,585 shares at an average $55.99.
Changes, outlook, and risks
- Net income improvement reflected higher revenue and a lower effective tax rate: 17.5% versus 38.6%, principally following the U.S. corporate tax-rate reduction and stock-compensation tax benefits, partly offset by Tax Act-related nondeductible expenses. Tax accounting remained incomplete; CRA recorded a $53,000 adjustment to provisional Tax Act amounts and said further changes could affect tax expense.
- CRA adopted ASC 606 using the modified retrospective method. The $0.4 million cumulative effect increased opening retained earnings; prior-year results were not recast, so comparisons use different revenue-recognition standards.
- Management said available cash, operating cash flow, and the revolving facility should meet anticipated working-capital and capital needs for at least 12 months. No specific revenue or earnings guidance was provided. Management expects regular quarterly dividends and said it expects to continue repurchases, both subject to board discretion and available resources.
- Management identified material weaknesses in internal controls over financial reporting, including controls for non-routine technical accounting and IT general controls over accounting-software program changes. Previously identified weaknesses affecting revenue/reserve and compensation processes were not remediated. Disclosure controls were deemed ineffective as of March 31, although management said the financial statements fairly present the company’s results.
- CRA disclosed ordinary-course legal actions but did not expect pending matters to materially affect financial position or results. It reported no material change to the risk factors in its prior Form 10-K. It also disclosed a transposition of two December 2017 liability classifications; the error was immaterial and had no net effect on total liabilities.
Most important facts for investors to verify
- Confirm the reporting-period designation: the filing covers Q1 2018, not Q1 2017.
- Assess the sustainability of revenue and margin growth, including utilization, staffing, compensation costs, and the differing ASC 606/ASC 605 accounting bases.
- Track operating cash conversion, bonus-related cash outflows, unbilled receivables, and the sharp increase in forgivable loans.
- Review post-quarter borrowing and repurchase activity, remaining revolver availability, and covenant headroom.
- Monitor remediation of the disclosed material weaknesses and completion of the company’s Tax Act accounting.