CRA International, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 28, 2013 (52 weeks). The filing also reports fourth-quarter results. CRA provides economic, financial, litigation, regulatory, and management consulting services; its consulting businesses represented about 98% of revenue, with software subsidiary NeuCo contributing the remainder.
Financial performance and position
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $278.4 million | $270.4 million |
| Gross profit / margin | $89.2 million / 32.0% | $88.0 million / 32.5% |
| Operating income (loss) / margin | $18.5 million / 6.7% | $(57.8) million / (21.4)% |
| Net income (loss) attributable to CRA / diluted EPS | $11.4 million / $1.12 | $(53.0) million / $(5.21) |
| Cash from operations | $18.4 million | $(8.5) million |
| Cash and cash equivalents at year-end | $51.3 million | $55.5 million |
| Working capital | $75.0 million | $102.5 million |
FY2013 cost of services was $189.3 million, or 68.0% of revenue; SG&A was $64.2 million, or 23.1%. The company recorded no goodwill impairment in FY2013, versus a non-cash $71.4 million charge in FY2012. CRA reported $1.0 million of long-term notes payable and no revolving-credit borrowings at year-end. Its $125 million revolving facility matures in April 2018; about $0.4 million of letters of credit reduced availability.
Cash from investing activities was $(18.4) million, including $15.6 million of net acquisition consideration and $2.8 million of capital expenditures. Financing activities used $4.5 million, including $2.2 million for share repurchases. Cash decreased by $4.2 million over the year.
Changes versus the prior comparable period
- Revenue rose 3.0%, primarily from stronger litigation, regulatory, and financial consulting in the second half and contributions from senior hires. Management consulting revenue declined, although backlog improved late in the year.
- Utilization improved to 73% from 68%. Gross margin edged down from 32.5% to 32.0%, partly reflecting higher forgivable-loan amortization and reimbursable expenses.
- SG&A fell 4.5%, with lower restructuring, occupancy, travel, and professional-fee costs; this was partly offset by higher commissions to non-employee experts.
- Cash from operations improved from negative $8.5 million to positive $18.4 million. The year-end working-capital decline reflected, among other items, payment of employee and expert loans and advances.
- FY2012’s reported loss largely reflects the $71.4 million goodwill impairment. Quarterly revenue increased through FY2013, from $63.1 million in Q1 to $75.7 million in Q4; Q4 net income attributable to CRA was $3.7 million, or $0.37 diluted EPS.
Outlook, risks, contingencies, and unusual items
- Outlook: CRA gave no specific revenue or earnings guidance. Management said cash, operating cash generation, and credit availability should meet anticipated working-capital and capital-expenditure needs for at least 12 months.
- Key business risks: Revenue depends on retaining and recruiting expert consultants and non-employee specialists; a small number of key people generate significant business. Engagements can end abruptly, utilization and quarterly results are seasonal and variable, and conflicts may prevent CRA from accepting work. Antitrust and M&A activity, client budgets, economic conditions, and regulation can affect demand.
- Forgivable loans: CRA issued $38.8 million in forgivable loans during FY2013 and recorded $7.1 million more loan amortization expense than in FY2012. Forgivable loans reported in current and other assets totaled approximately $52.8 million at year-end. A further $5.0 million committed for future employees was issued and paid in Q1 FY2014.
- Acquisition and awards: An approximately 40-person litigation consulting team joined in February 2013; the acquisition was described as not material. Certain acquired-team employees and experts may receive performance awards tied to targets through May 2017, with retention conditions extending to May 2019.
- Controls: Management and KPMG concluded internal control over financial reporting was ineffective because of a material weakness in income-tax accounting and documentation/review. Management reported that corrected tax misstatements were immaterial and initiated remediation. KPMG gave an adverse opinion on internal controls, while issuing an unqualified opinion on the financial statements.
- Other matters: The company authorized an additional $15 million share-repurchase program in February 2014. It also signed a new Boston office lease for 57,602 square feet, with a 10-year base term and first-year annual fixed rent of about $2.4 million; commencement was expected in Q2 FY2015. No legal proceedings were reported in Item 3.
Most important facts for investors to verify
- Whether improved utilization and litigation-consulting demand continued after FY2013, and whether management consulting recovered.
- The cash-flow and compensation effects of forgivable-loan issuance, amortization, repayment, and retention terms.
- Remediation of the income-tax control weakness and any subsequent audit or reporting consequences.
- Receivables and collections: year-end accounts receivable and unbilled services were substantial, and average days sales outstanding was 94 days.
- Facility covenant compliance, future borrowing needs, share repurchases, and the financial impact of the new Boston lease.