CRA International, Inc. — Form 10-Q Summary
Reporting period: Quarter ended July 2, 2011; fiscal year began January 2, 2011. CRA provides litigation, regulatory, financial, and management consulting services and reports one consulting-services segment. Financial statements are unaudited.
Business context and comparability
CRA changed its fiscal year-end to the Saturday nearest December 31. Consequently, Q2 2011 covers 13 weeks versus 12 weeks in the prior comparison, and year-to-date (YTD) covers 26 weeks versus 24 weeks. The prior periods ended May 14, 2010; CRA did not prepare matching 2010 calendar-period information. Growth rates therefore reflect unequal period lengths and are not strictly like-for-like.
Financial performance
| Metric | Q2 2011 | Prior comparison | YTD 2011 | Prior comparison |
|---|---|---|---|---|
| Revenue | $80.6m | $68.1m | $159.2m | $126.9m |
| Gross profit / margin | $26.9m / 33.4% | $18.0m / 26.5% | $54.0m / 33.9% | $36.4m / 28.7% |
| Operating income (loss) / margin | $7.0m / 8.6% | ($0.9m) / (1.4%) | $14.9m / 9.4% | $0.4m / 0.3% |
| Net income (loss) attributable to CRA | $4.3m | ($1.5m) | $8.7m | ($1.3m) |
| Diluted EPS | $0.40 | ($0.14) | $0.81 | ($0.12) |
Revenue increased 18.5% in Q2 and 25.5% YTD, but both comparisons include additional weeks in 2011. Management cited stronger demand, higher utilization (74% Q2; 75% YTD), increased billing rates, business-development investment, and lower consultant headcount (519 versus 554 at the prior-year comparison dates). International revenue was about 29% of total, versus 28% in Q2 and 27% YTD in the prior comparisons. Fixed-price work rose to about 25% of revenue from 19% in Q2 and 17% YTD.
Margins improved as revenue grew and prior-year restructuring costs did not recur in cost of services. Compensation, incentive bonuses, reimbursable expenses, and business-development spending increased. Q2 SG&A included $1.0m of restructuring expense, principally a revised estimate of costs for the former Houston office lease. YTD depreciation and amortization was $2.6m. YTD tax provision was $5.7m, or 40.3%; the prior comparison showed a $0.1m tax benefit, with the effective rate affected by foreign losses that could not be benefited.
Cash flow, balance sheet, debt, and liquidity
- YTD operating cash flow was negative $7.4m, versus negative $9.5m in the prior comparison. Receivables and unbilled services used $13.3m of cash; unbilled services alone increased $10.0m.
- Investing cash use was $19.8m, including $4.5m of capital expenditures, $0.8m net acquisition consideration, and net purchases of investments. Financing cash use was $23.7m, mainly the $21.9m debenture repurchase and $1.4m of share repurchases.
- Cash and equivalents were $37.2m, short-term investments $14.5m, and working capital $104.8m at July 2, 2011. Cash and equivalents had declined $50.3m since January 1.
- The company repurchased all remaining convertible debentures on June 15 for $21.9m principal plus $0.3m accrued interest; none remained outstanding at quarter-end. Notes payable totaled approximately $2.3m.
- A $60.0m revolving credit facility, maturing April 30, 2014, had no borrowings and $0.9m of letters of credit outstanding. CRA reported compliance with its covenants. The facility requires minimum working capital of $25.0m and a senior debt-to-EBITDA ratio no greater than 2.5:1.
- DSOs were 105 days versus 94 days at the prior comparison date. Management said cash, operating cash generation, and available credit should meet anticipated needs for at least 12 months.
Outlook, risks, and unusual items
No numerical revenue or earnings guidance is provided in the filing. Management reported improving demand while noting that clients continued to manage spending amid economic uncertainty. It expected to continue share repurchases under the existing $5m program; approximately $1.5m had been spent through July 2. A contingent employee award related to a prior acquisition was estimated at approximately $12m based on performance to date and expectations; payment, if earned, is expected in fiscal 2013 and continued employment through 2016 is required for retention.
Key disclosed risks include reliance on key consultants and non-employee experts, competition and recruiting costs, exposure to large engagements and clients, engagement cancellations, receivable collection, and execution risk on increasingly prevalent fixed-price work. Global economic and regulatory changes may affect client demand, including antitrust and M&A activity. International operations create currency and other risks; a hypothetical 10% foreign-exchange movement would have affected Q2 pretax income by about $0.9m. CRA had no outstanding derivatives. Goodwill was $142.0m; no impairment was recorded, but management planned continued monitoring and an annual impairment test in Q4. Cash concentration at one financial institution was also disclosed. Legal proceedings: none reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Assess revenue and earnings growth using comparable week counts; the reported prior-year periods are shorter and end on different dates.
- Track utilization, consultant headcount, billing rates, incentive compensation, and whether recent margin gains persist.
- Monitor DSO, unbilled services, receivable allowances, and operating cash conversion as demand and revenue grow.
- Review fixed-price project mix and cost-estimation performance, as well as customer and engagement concentration.
- Confirm future cash needs for the estimated acquisition-related award, share repurchases, capital investment, and any acquisitions; monitor credit-facility covenants and goodwill impairment indicators.