CRA International, Inc. — Form 10-K Summary
Period clarification: The supplied filing is for the fiscal year ended January 2, 2016 (fiscal 2015, 52 weeks), not 2014 Q4 as indicated in the request metadata. The comparable fiscal 2014 had 53 weeks.
Business context and reporting period
CRA provides economic, financial, litigation and regulatory, and management consulting services. These consulting businesses represented approximately 99% of fiscal 2015 revenue; majority-owned software subsidiary NeuCo represented approximately 1%. At year-end CRA employed 511 consultants. No single client contributed more than 5% of revenue in fiscal 2015, 2014, or 2013.
Key financial metrics
| Metric | Fiscal 2015 | Fiscal 2014 |
|---|---|---|
| Revenue | $303.6 million | $306.4 million |
| Gross profit / margin | $95.9 million / 31.6% | $99.6 million / 32.5% |
| Operating income / margin | $12.4 million / 4.0% | $24.0 million / 7.9% |
| Net income attributable to CRA | $7.7 million | $13.6 million |
| Diluted EPS | $0.83 | $1.38 |
| Operating cash flow | $20.4 million | $30.2 million |
| Cash and cash equivalents at year-end | $38.1 million | $48.2 million |
| Working capital at year-end | $54.3 million | $56.3 million |
| Revolving credit borrowings | None | None |
Cash used in investing activities was $16.5 million, including $18.0 million of capital expenditures, primarily for office build-outs. Cash used in financing activities was $13.0 million, including $12.8 million of share repurchases. CRA had approximately $122.5 million available under its $125 million revolving facility after letters of credit. Total operating lease obligations were $74.5 million.
Material changes versus the prior comparable period
- Revenue decreased 1.0%; management attributed the decline primarily to one fewer fiscal week and utilization falling from 76% to 74%. Increased headcount and its integration in the second half also weighed on utilization.
- Costs of services rose 0.4%, while gross margin declined 0.9 percentage points. SG&A increased 4.8%, including temporary overlapping rent during office relocations and higher recruiting, marketing, professional-services, and travel costs.
- Operating income fell by $11.6 million. The decline included a $4.5 million NeuCo goodwill impairment; even excluding that charge, operating performance was lower than in fiscal 2014.
- CRA reported a $0.6 million gain from settling NeuCo debt for less than its carrying amount. The related final $75,000 payment was made after year-end.
- Days sales outstanding increased from 99 to 105 days. Cash declined $10.1 million, reflecting bonus payments, higher receivables, and repurchases. Fiscal 2015 share repurchases totaled 477,292 shares for $12.8 million.
- NeuCo revenue declined to $3.8 million from $4.8 million, and its reported net loss increased to $3.0 million from $0.5 million.
Outlook, risks, contingencies, and unusual items
- Management gave no specific revenue or earnings guidance. It said cash, operating cash generation, and available credit were expected to cover anticipated working-capital and capital needs for at least the next 12 months, excluding unplanned acquisitions or other significant changes.
- CRA identified a material weakness in internal control over financial reporting concerning accounting for NeuCo noncontrolling interests and deficiencies in the financial-statement close process. The related amounts were corrected in the statements, but management and the auditor concluded controls were ineffective as of January 2, 2016. Remediation was initiated. A separate earlier weakness concerning non-routine compensation arrangements was reported as remediated.
- In the fourth quarter, NeuCo’s $4.5 million goodwill impairment resulted in a $1.6 million net charge after taxes and noncontrolling-interest allocation. CRA’s consulting reporting unit had no impairment.
- Fiscal 2015’s effective tax rate was 46.5%, versus 42.5% in fiscal 2014; CRA said it would have been 43.2% absent the NeuCo impairment. Higher tax reserves and permanent items also affected the rate.
- CRA disclosed an immaterial prior-period error identified in fiscal 2015 involving client reimbursable revenue and expenses; it recorded a $0.7 million revenue adjustment and a $0.3 million pretax-income adjustment. A separate immaterial deferred-tax error in fiscal 2014 resulted in a $0.8 million noncash tax expense.
- After year-end, CRA announced a modified Dutch-auction tender offer to repurchase up to $30 million of shares at $18.00–$19.75 per share, to be funded with cash and potentially revolver borrowings. The offer was scheduled to expire March 21, 2016, unless extended.
- Principal risks include retaining and recruiting consultants and non-employee experts, utilization and billing-rate pressure, engagement cancellations, economic and regulatory changes, collection risk, cybersecurity and confidentiality, foreign exchange, and fixed-price project overruns. CRA reported no material pending legal proceeding; it said ordinary-course claims were not expected to materially affect results.
Most important facts for investors to verify
- Confirm the reporting period: fiscal 2015 ended January 2, 2016; it is not a 2014 Q4 filing.
- Review the material weakness, its scope and remediation progress, especially controls over NeuCo noncontrolling-interest allocations and the close process.
- Assess whether lower utilization, added headcount, and higher operating expenses were temporary or indicative of continued margin pressure.
- Evaluate receivables and collection trends in light of DSO rising to 105 days and the increase in accounts receivable.
- Consider the scale and financing of the post-year-end $30 million tender offer alongside cash needs, lease commitments, and the revolver.
- Reconcile reported annual earnings with the fourth-quarter loss attributable to CRA, which included the NeuCo impairment and other quarter-end adjustments.