CRA International, Inc. — Q1 2012 Form 10-Q
Business context and period: CRA provides litigation, regulatory and financial consulting, and management consulting services. This unaudited filing covers the fiscal quarter ended March 31, 2012; comparisons are with the quarter ended April 2, 2011.
Financial performance
| Metric | Q1 2012 | Prior-year quarter | Change / context |
|---|---|---|---|
| Revenue | $69.1 million | $78.6 million | Down 12.1% |
| Gross profit / margin | $22.6 million / 32.8% | $27.0 million / 34.4% | Margin down 1.6 percentage points |
| Operating income / margin | $3.3 million / 4.8% | $7.9 million / 10.1% | Substantially lower |
| Net income attributable to CRA | $519,000 | $4.4 million | Diluted EPS was $0.05 versus $0.41 |
| Operating cash flow | $(21.1) million | $(2.9) million | Greater cash use |
| Cash and cash equivalents | $41.6 million | $61.6 million at Dec. 31, 2011 | Quarterly decrease of $20.0 million |
Costs of services were $46.5 million, or 67.2% of revenue, compared with $51.6 million, or 65.6%. SG&A was $17.9 million, including $0.5 million in restructuring expense; depreciation and amortization was $1.5 million. The effective tax rate rose to 86.6% from 40.2%, principally because foreign losses generated no tax benefit. Comprehensive income attributable to CRA was $2.2 million, including $1.7 million of foreign-currency translation gains.
Balance sheet, liquidity and cash flows
At March 31, 2012, cash and short-term investments totaled $51.1 million; working capital was $104.5 million. Total assets were $354.3 million and shareholders’ equity was $268.7 million. Notes payable totaled $2.3 million, including $0.7 million current. No borrowings were outstanding on the $60 million revolving credit facility; $0.7 million of letters of credit reduced availability. CRA reported compliance with facility covenants.
Operating cash use reflected $18.8 million of lower accounts payable, accrued expenses and other liabilities, largely from payment of fiscal 2011 bonuses, and a $19.0 million increase in unbilled services. The company said its new financial reporting system delayed billing at the start of the quarter and increased days sales outstanding. These cash uses were partly offset by a $13.8 million reduction in accounts receivable. Investing activities provided $4.3 million, mainly from net investment maturities; financing activities used $3.4 million, including $3.1 million for share repurchases.
Material changes and management commentary
- Management attributed the revenue decline mainly to weaker-than-expected management consulting demand, as some clients deferred projects amid economic and market challenges. Litigation, regulatory and financial consulting performed solidly and continued to grow.
- Utilization fell to 68% from 75%. International revenue declined to approximately 20% of total from 28%, with particular softness in Europe. Fixed-price work fell to 10% of revenue from 25%, reflecting the management consulting slowdown.
- Revenue fell faster than costs, reducing gross and operating margins. Interest expense declined to $80,000 from $392,000 following repayment of the convertible debentures in June 2011.
- CRA said existing cash, operating cash generation and available credit should cover anticipated working capital and capital expenditure needs for at least 12 months. No specific revenue or earnings guidance was provided.
Outlook, risks and unusual items
- On April 2, 2012, CRA agreed to surrender one floor of its London office lease effective June 30, 2012, paying approximately $1.2 million. It estimated a pre-tax restructuring charge of approximately $2 million in Q2 and a $3.6 million aggregate reduction in lease obligations for fiscal 2013–2016; future savings could be affected by other costs.
- A contingent employee award tied to a previously acquired business was estimated at approximately $9.6 million, subject to performance and continued employment through 2016; payment, if earned, is expected in Q1 2013.
- CRA repurchased 122,800 shares in Q1 at an average $24.87 per share. At quarter-end, $4.7 million remained available under its repurchase programs.
- Key risks include continued weak demand and utilization, dependence on key consultants and non-employee experts, competition for talent, engagement concentration and client payment risk, fixed-price project cost overruns, international and foreign-exchange exposure, and potential goodwill impairment. A hypothetical 10% foreign-exchange move would have affected Q1 pretax income by approximately $0.8 million. The annual goodwill test had found estimated fair value approximately 25% above carrying value; management warned impairment could arise if market capitalization remained below carrying value, including the control premium.
- No legal proceedings were reported. Management concluded disclosure controls were effective and reported no material Q1 change in internal control over financial reporting.
Important facts for investors to verify
- Whether management consulting demand, utilization and billing cadence improved after the quarter, particularly following the reporting-system transition.
- Whether the large increase in unbilled services converted to billed receivables and cash, and whether collections and days sales outstanding normalized.
- Whether the Q2 London lease surrender charge and expected lease savings match management’s estimates.
- How the unusually high effective tax rate and the estimated contingent employee award affect subsequent-period earnings and cash needs.
- Whether continued share repurchases, liquidity and covenant compliance remain consistent with the company’s stated 12-month funding outlook.