CRA International, Inc. — Form 10-Q Summary
Period clarification: The filing covers the quarter ended September 27, 2014 and fiscal year-to-date through that date, compared with corresponding 2013 periods. This differs from the request metadata’s “2013 Q3.” Unless otherwise stated, amounts below are in U.S. dollars; financial statement amounts are in millions.
Business context and reporting period
CRA provides litigation, regulatory and financial consulting, and management consulting services. It reports one business segment. Most revenue comes from professional services, primarily time-and-materials contracts. The interim financial statements are unaudited.
Financial performance and liquidity
| Metric | Quarter ended Sep. 27, 2014 | Quarter ended Sep. 28, 2013 | Fiscal YTD 2014 | Fiscal YTD 2013 |
|---|---|---|---|---|
| Revenue | $73.5 | $74.4 | $227.9 | $202.8 |
| Gross profit / margin | $24.1 / 32.8% | $23.9 / 32.0% | $74.0 / 32.5% | $65.1 / 32.1% |
| Operating income / margin | $5.8 / 7.9% | $6.1 / 8.2% | $17.9 / 7.9% | $13.1 / 6.4% |
| Net income attributable to CRA | $3.2 | $3.3 | $9.8 | $7.6 |
| Diluted EPS | $0.33 | $0.32 | $0.98 | $0.75 |
| Net cash from (used in) operations | Not provided by quarter | Not provided by quarter | $10.8 | $(17.1) |
- Quarterly comparison: Revenue declined 1.3%; CRA-attributable net income fell about 1.4%, while diluted EPS rose from $0.32 to $0.33 as average diluted shares declined.
- Fiscal YTD comparison: Revenue increased 12.4% and CRA-attributable net income increased about 28%. Diluted EPS rose to $0.98 from $0.75.
- Cash and working capital: Cash was $44.7 at quarter-end, down $6.6 from fiscal year-end 2013; working capital was $81.6. Operating cash flow was $10.8, investing cash use was $4.6, and financing cash use was $12.1, primarily reflecting $11.9 of share repurchases.
- Balance sheet and debt: Total assets were $307.6 and shareholders’ equity was $224.5. The company had $0.981 of notes payable and no revolver borrowings. Its $125.0 revolving facility had $1.3 of letters of credit outstanding; CRA reported covenant compliance.
- Liquidity measures: Current assets were $157.0 and current liabilities $75.4. CRA stated it expected cash, operating cash generation and available credit to meet anticipated needs for at least the next 12 months.
Material changes versus the prior comparable period
- Quarterly revenue was lower despite management’s report of solid performance in both consulting areas. Utilization declined to 75% from 78%; lower reimbursable expenses and a $0.2 decline in NeuCo revenue also contributed.
- Fiscal YTD revenue growth reflected stronger activity in both consulting areas, organic growth and contributions from senior hires. Utilization rose to 77% from 70%.
- Gross margin improved in both comparisons. For the quarter, lower reimbursable costs helped; fiscal YTD, revenue growth outpaced service-cost growth. Quarterly SG&A rose 3.6%, while fiscal YTD SG&A rose 8.5% but declined as a share of revenue.
- Fiscal YTD cash from operations improved substantially from the prior-period outflow. The filing attributes cash use in 2014 in part to payment of prior-year bonuses, higher days sales outstanding (98 days versus 94 at fiscal 2013 year-end), and share repurchases.
Outlook, risks, contingencies and unusual items
- Outlook: The filing provides no quantified earnings or revenue guidance. Management cited available cash, operating cash generation and credit availability as sufficient for anticipated needs for at least 12 months.
- Capital returns: CRA repurchased 531,694 shares fiscal YTD at an average $23.91, with about $3.7 remaining under existing programs at September 27. On October 23, 2014, the board approved an additional repurchase program of up to $30.
- Tax and controls: Fiscal YTD effective tax rate was 44.1%, versus 40.8%. The 2014 rate included a $0.8 noncash tax expense in the second quarter to correct an immaterial prior-period error. Management concluded disclosure controls were not effective because of an ongoing material weakness in income-tax accounting and reporting; management nevertheless stated the financial statements fairly present results in all material respects.
- Other items: CRA reported no restructuring charges in the 2014 quarter or fiscal YTD. No goodwill impairment was recorded. The prior-year cash flow statement was reclassified for debt issuance costs; the revision was stated to be immaterial.
- Key risks: Dependence on key consultants and non-employee experts, utilization and project timing, client and engagement concentration, competition for talent, collection of receivables and unbilled work, fixed-price project estimates, foreign-exchange exposure, acquisitions, and goodwill impairment. A hypothetical 10% currency movement would have affected quarterly pretax income by approximately $0.2. Cash was substantially concentrated at one financial institution. No legal proceedings were reported.
- CRA issued approximately $10.2 in forgivable loans to employees and non-employee experts fiscal YTD. It also had contingent incentive-performance awards tied to future results and continued service.
Important facts for investors to verify
- Confirm the correct reporting period: the filing is for Q3 2014, not Q3 2013.
- Assess whether the reduced quarterly utilization and revenue are temporary, alongside the stronger fiscal YTD trend.
- Track the income-tax control weakness, remediation progress and effects of tax adjustments on reported earnings.
- Review cash conversion, receivable aging, unbilled services and days sales outstanding, given the increase to 98 days.
- Evaluate the scale and execution of the new $30 share repurchase authorization relative to cash needs and the company’s consulting growth.