CRA International, Inc. — Form 10-Q Summary
Period: Fiscal quarter and year-to-date ended June 27, 2020; comparable periods ended June 29, 2019. The request metadata says “2019 Q2,” but the filing itself is for 2020 Q2.
Business context and financial performance
CRA is a global consulting firm providing litigation, regulatory and financial consulting, and management consulting. It reports one business segment. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $123.0 | $110.6 | $249.2 | $216.4 |
| Operating income | $8.3 | $8.3 | $16.4 | $15.2 |
| Operating margin | 6.8% | 7.5% | 6.6% | 7.0% |
| Net income | $5.9 | $5.6 | $12.4 | $10.2 |
| Diluted EPS | $0.75 | $0.68 | $1.55 | $1.23 |
| Operating cash flow | Not separately stated for quarter | $(44.3) | $(46.1) |
Q2 revenue grew 11.3%; first-half revenue grew 15.2%. Growth reflected higher gross revenue and lower write-offs and reserves. Costs of services rose faster than revenue, reaching 73.3% of revenue in Q2 versus 68.7% a year earlier; first-half costs were 72.7% versus 69.1%. SG&A fell as a percentage of revenue, to 17.4% in Q2 from 21.5%, and to 18.3% for the first half from 21.5%. Net margin was 4.8% in Q2 and 5.0% year to date.
Balance sheet, cash flow and liquidity
- At June 27, 2020, cash was $18.8 million, total assets $548.6 million, and shareholders’ equity $202.2 million.
- Working capital was negative $7.6 million. Management attributed much of the decline to classifying a $12.6 million contingent consideration liability as current, due by the end of Q2 2021.
- CRA had $59.0 million drawn on its $125.0 million revolving credit facility; $4.4 million of letters of credit reduced availability. Management reported $61.6 million of remaining borrowing capacity and total liquidity of $80.4 million, and believed liquidity plus operating cash flows would meet needs for at least 12 months.
- Operating cash use was $44.3 million in the first half, primarily reflecting payment of prior-year bonuses and awards, increased unbilled receivables, and $25.5 million of net forgivable-loan funding. Investing cash use was $13.5 million, mainly office buildouts. Financing provided $51.7 million, including $59.0 million of net revolving-credit borrowings.
- Forgivable loans totaled $70.5 million, up from $55.1 million at fiscal year-end. Capital expenditures were $13.5 million. CRA paid $3.6 million in dividends and repurchased $3.8 million of shares in the first half.
Changes, outlook and risks
- Consultant headcount increased 20.8%, from 664 to 802, while utilization declined to 66% in Q2 from 77% and to 68% for the first half from 76%. Higher compensation, incentive and retention costs contributed to weaker operating margins.
- Management said COVID-19 had not materially adversely affected results through June 27, but warned that project timing, new engagements, client demand and economic conditions could be disrupted. The company shifted to remote work and was planning a phased office return. No numerical earnings or revenue guidance was provided.
- Management stated that current results may not indicate full-year results and that the duration and magnitude of COVID-19 effects could not be reasonably estimated.
- The $12.6 million contingent consideration liability is a Level 3 fair-value estimate tied to the C1 acquisition; it is due before the end of Q2 2021. Its remeasurement depends on internal revenue projections and other unobservable assumptions.
- CRA disclosed material weaknesses in internal controls over incentive-compensation liabilities, certain revenue-related accounting, and completeness of certain payables and expense accruals. Disclosure controls were deemed ineffective as of June 27, 2020; management said the financial statements nevertheless fairly presented results in all material respects and remediation was ongoing.
- The company reported no material change to other risk factors besides COVID-19. It reported no legal proceedings in the relevant section and said ordinary-course legal matters were not expected to materially affect financial position or results.
- On July 30, 2020, the board declared a $0.23-per-share quarterly dividend, payable September 14 to holders of record August 25.
Important facts for investors to verify
- Confirm the reporting-period discrepancy: the filing covers Q2 2020, not Q2 2019.
- Track utilization and margins as the expanded consultant workforce is deployed, and assess whether revenue growth can offset higher service costs.
- Review operating cash conversion, unbilled services and forgivable-loan advances, alongside negative working capital and revolving-credit usage.
- Monitor COVID-19 impacts on client demand, project timing, and management’s 12-month liquidity assessment.
- Assess progress remediating the disclosed material weaknesses in internal controls.
- Verify settlement timing and assumptions underlying the $12.6 million contingent consideration obligation and compliance with credit-facility covenants.