CRA International, Inc. — Form 10-Q Summary
Period: Fiscal quarter ended April 1, 2017, compared with the quarter ended April 2, 2016. The filing covers 2017 Q1, despite the request metadata labeling the period “2016 Q1.” CRA is a global consulting firm serving litigation, regulatory, financial, and management consulting clients; it reports one business segment.
Financial performance and liquidity
- Revenue: $88.2 million, up 9.0% year over year. Growth was driven mainly by litigation, regulatory, and business consulting practices, increased consultant headcount, and the C1 acquisition. Utilization fell to 72% from 75%.
- Profit and margins: Gross profit was $25.6 million, up 0.8%; gross margin declined to 29.0% from 31.4%. Operating income increased to $4.9 million from $4.3 million, and operating margin rose to 5.6% from 5.3%. Net income attributable to CRA was $2.9 million versus $2.4 million; diluted EPS was $0.33 versus $0.27.
- Costs and taxes: Costs of services rose 12.7% to $62.6 million, outpacing revenue growth, principally due to higher compensation, incentive and retention costs, forgivable-loan amortization, and reimbursable expenses. SG&A declined 2.6% to $18.7 million. The effective tax rate fell to 38.6% from 46.5%, reflecting geographic earnings mix and a stock-compensation tax benefit, partly offset by discrete items.
- Cash flow: Operating cash use was $20.4 million, versus $10.0 million a year earlier; the company attributed much of the use to payment of fiscal 2016 bonuses and an increase in unbilled services. Investing cash use was $17.0 million, including $16.2 million for C1 and $0.8 million of capital expenditures. Financing provided $5.4 million, including $6.0 million of revolver borrowings. Cash fell $31.7 million during the quarter to $21.8 million.
- Balance sheet and debt: Current assets were $150.1 million and current liabilities $82.0 million; management reported working capital of $68.3 million. CRA had $6.0 million outstanding on its $125.0 million revolving facility, with $2.2 million of letters of credit reducing availability. It was compliant with credit covenants. Total assets were $322.4 million and shareholders’ equity $215.3 million.
Material changes and notable items
- CRA acquired substantially all assets and assumed certain liabilities of C1 Consulting on January 30, 2017, expanding life-sciences consulting and geographic reach. The preliminary purchase-price allocation included $12.8 million of goodwill, $9.0 million of acquired intangible assets, and $2.9 million of contingent consideration. Acquisition-related costs were $0.5 million.
- Fixed-price engagements increased to 19% of revenue from 13%, primarily due to C1. Revenue outside the U.S. declined to approximately 18% of total revenue from 22%.
- Adoption of ASU 2016-09 produced a $0.3 million tax benefit in the quarter.
- The board declared a subsequent quarterly dividend of $0.14 per share and authorized an additional $20 million of share repurchases; total available repurchase authorization became $29 million. No shares were repurchased under the program during the quarter.
Outlook, risks, and contingencies
- Management said cash, operating cash generation, and revolver availability should fund anticipated working-capital and capital needs for at least 12 months. No specific revenue or earnings guidance was provided.
- Liquidity is affected by bonus payments, hiring and retention needs, acquisitions, dividends, repurchases, and contingent acquisition payments. Management cautioned that additional acquisitions, changed business plans, or economic conditions could create funding needs beyond currently identified resources.
- Controls concern: Management concluded disclosure controls were not effective at April 1, 2017 due to material weaknesses involving revenue and reserve processes, compensation-related processes, and certain non-routine technical accounting. Remediation was underway, including additional technical accounting staff and appointment of a Chief Accounting Officer. Management nevertheless stated the quarter’s financial statements fairly presented the company’s financial position and results.
- CRA reported no material change to previously disclosed risk factors and no pending legal proceeding expected to materially affect its financial position or results. It noted customer receivable collectability, estimates, and contingent consideration valuations as areas involving judgment.
- Subsequent lease amendments added New York office space and extended the Chicago lease, creating future rent commitments. The filing gives the related lease terms and estimated rents.
Key facts for investors to verify
- Whether revenue growth and the enlarged consultant base translate into improved utilization and gross margins.
- Whether operating cash flow recovers after bonus payments and growth in unbilled services, and how receivables and reserves develop.
- C1’s contribution to revenue and profit, and changes in its contingent consideration valuation and purchase-price allocation.
- Progress and effectiveness of remediation for the disclosed material weaknesses in internal controls.
- Use of the revolver, dividend and repurchase commitments, and the financial impact of new lease obligations.