CRA International, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and year-to-date period ended July 4, 2015; comparisons are to periods ended June 28, 2014. The request metadata says “2014 Q2,” but the filing itself is for fiscal 2015 Q2.
Business context
CRA provides litigation, regulatory and financial consulting, and management consulting services, operating as Charles River Associates. It reports one consulting-services segment. The statements are unaudited.
Financial performance
| Metric | Quarter ended July 4, 2015 | Prior-year quarter | Fiscal year to date | Prior-year year to date |
|---|---|---|---|---|
| Revenue | $76.5 million | $78.2 million | $154.6 million | $154.4 million |
| Gross profit / margin | $25.9 million / 33.8% | $25.5 million / 32.6% | $50.1 million / 32.4% | $49.9 million / 32.3% |
| Operating income / margin | $5.6 million / 7.4% | $6.5 million / 8.3% | $10.1 million / 6.5% | $12.1 million / 7.8% |
| Net income attributable to CRA | $3.3 million | $3.2 million | $6.1 million | $6.6 million |
| Diluted EPS | $0.36 | $0.32 | $0.65 | $0.66 |
Quarterly revenue declined 2.1%; year-to-date revenue was essentially flat. Quarterly diluted EPS rose as average diluted shares fell to 9.3 million from 10.0 million, largely reflecting repurchases. Year-to-date attributable income declined despite a $0.6 million debt-extinguishment gain recorded in Q1 2015.
- Cash flow: Year-to-date operating cash flow was negative $16.6 million, versus negative $15.2 million a year earlier. Investing cash flow was negative $7.0 million, including $8.5 million of capital expenditures; financing cash flow was negative $8.2 million, principally due to $8.0 million of share repurchases.
- Liquidity: Cash and equivalents were $15.8 million at July 4, down from $48.2 million at January 3, 2015. Working capital was $78.0 million. Management said cash, operating cash generation and credit availability should meet anticipated needs for at least 12 months.
- Debt: No borrowings were outstanding under the $125 million revolving facility; $1.3 million of letters of credit reduced availability. CRA reported compliance with its covenants. NeuCo’s remaining note payable was $75,000, due in 2016 under a settlement arrangement.
- Balance sheet: Total assets were $296.4 million and shareholders’ equity was $215.1 million. Accrued expenses fell to $45.0 million from $66.5 million, primarily reflecting bonus payments.
Material changes and management commentary
- Quarterly utilization declined to 75% from 78%; first-half utilization fell to 77% from 78%, partly offset by higher average headcount. Reduced reimbursable client expenses, which generally carry little margin, contributed to lower quarterly revenue.
- Quarterly costs of services declined 3.8%, lifting gross margin. SG&A rose 6.9% for the quarter and 6.1% year to date, driven by recruiting, marketing, travel and overlapping Boston office rent during construction of new space.
- Year-to-date effective tax rate was 39.1%, versus 44.7%, including benefits from foreign tax attributes and tax true-ups; the comparison period included a $0.8 million non-cash tax expense correcting a prior-period deferred-tax error that CRA deemed not material to prior periods.
- CRA repurchased 263,800 shares for $8.0 million in the first half, at an average $30.23 per share; approximately $12.9 million remained authorized for future repurchases. Management expected to continue repurchases.
Outlook, risks and unusual items
- On July 15, 2015, CRA signed a 10-year New York office lease, with fixed annual rent of approximately $1.84 million for the first five years and $1.96 million thereafter, plus operating costs. A $922,027 letter of credit secures the lease.
- A contingent acquisition liability increased from $0.3 million to $0.9 million; improved acquired-business performance drove a $0.8 million first-half charge to costs of services. The company also recorded a $0.6 million gain from NeuCo’s debt settlement.
- Management identified no goodwill impairment in the periods presented, but noted future impairment could arise if market capitalization and estimated control premium remain below carrying value.
- Disclosure controls were deemed ineffective at quarter-end due to an ongoing material weakness in accounting and reporting for non-routine compensation arrangements, including share-based compensation. Management nevertheless stated that the financial statements fairly present the company’s position and results in all material respects.
- Key risks include reliance on retaining and utilizing consultants and non-employee experts, project and large-engagement variability, client payment and collection risks, competition, foreign-exchange exposure, and dependence on key personnel. A hypothetical 10% foreign-exchange movement would have affected quarterly pretax income by approximately $1.1 million. A substantial portion of cash was held at one financial institution.
- No legal proceedings were reported. CRA had no outstanding derivative instruments and reported no restructuring charges in the periods presented.
Important facts for investors to verify
- Whether utilization, hiring and bill rates improve enough to support revenue and operating margins.
- How quickly operating cash flow recovers after bonus payments and office-related capital spending.
- Progress in remediating the material weakness in controls over non-routine compensation accounting.
- Actual costs and commitments associated with the new office leases and planned repurchases.
- Performance of the acquired business underlying contingent consideration, and the remaining NeuCo settlement payment.