CRA International, Inc. — Q2 2012 Form 10-Q
Business context and period. CRA provides litigation, regulatory, financial and management consulting services through one reporting segment. This unaudited filing covers the quarter ended June 30, 2012 and fiscal year to date; comparisons are to the quarter and year-to-date period ended July 2, 2011.
Financial performance
| Metric | Q2 2012 | Q2 2011 | YTD 2012 | YTD 2011 |
|---|---|---|---|---|
| Revenue | $67.8m | $80.6m | $136.9m | $159.2m |
| Gross profit / margin | $22.4m / 33.0% | $26.9m / 33.4% | $45.0m / 32.9% | $54.0m / 33.9% |
| Operating income / margin | $2.8m / 4.1% | $7.0m / 8.6% | $6.1m / 4.5% | $14.9m / 9.4% |
| Net income attributable to CRA | $0.7m | $4.3m | $1.2m | $8.7m |
| Diluted EPS | $0.07 | $0.40 | $0.12 | $0.81 |
- Revenue fell 15.9% in Q2 and 14.0% YTD. Management cited underperformance in Chemicals and Middle East operations, weaker management consulting activity, economic uncertainty in Europe, and lower reimbursable expenses. Utilization declined to 70% in Q2 from 74%, and to 69% YTD from 75%.
- Costs of services declined more slowly than revenue, reducing gross margins. SG&A also fell, but increased as a share of revenue. Depreciation and amortization rose, including about $1.1m of London leasehold and related write-offs. Q2 effective tax rate was 71.3% and YTD was 79.7%, primarily because foreign losses generated no tax benefit.
- Operating cash flow was negative $27.0m YTD, versus negative $7.4m in the prior period. The company attributed the outflow mainly to payment of prior-year performance bonuses and a $16.9m increase in unbilled services, partly offset by $13.7m lower receivables.
Balance sheet, liquidity and capital
- At June 30, cash and equivalents were $36.8m and short-term investments $5.0m, down from $61.6m and $14.5m, respectively, at year-end 2011. Working capital was $106.4m.
- Total notes payable were approximately $2.3m. No borrowings were outstanding on the $60m revolving credit facility; $0.7m of letters of credit reduced availability. CRA reported compliance with facility covenants. The facility matures April 30, 2014.
- YTD investing activities provided $8.0m, mainly reflecting net sales of short-term investments; financing activities used $5.7m, including $5.6m of share repurchases. The company repurchased 252,585 shares YTD at an average $22.28; $2.1m remained authorized for future repurchases.
- Management said available cash, investments, operating cash generation and credit availability should cover anticipated working capital and capital expenditure needs for at least 12 months. Cash concentration at one financial institution was identified as a liquidity risk, although management reported no losses and considered non-performance risk low.
Outlook, material developments and risks
- On July 22, 2012, management committed to a restructuring plan to eliminate the Chemicals practice, close Middle East operations, reposition selected practices, reduce approximately 55 consulting positions, and lower administrative costs. Most actions were expected in Q3 and Q4 fiscal 2012. CRA expected a Q3 charge of approximately $3.5m–$4.5m; actual costs and benefits remained uncertain.
- CRA reported no goodwill or intangible-asset impairment through June 30, despite a significant late-quarter stock-price decline. The 2011 impairment test had fair value about 25% above carrying value. Management warned that a sustained decline in market capitalization or other adverse indicators could require a future impairment charge.
- Other items include a commitment to issue approximately $7.1m of forgivable loans in Q3 for future service, and an estimated $9.6m performance-related award tied to a prior acquisition, potentially payable in Q1 2013 subject to conditions and performance.
- CRA surrendered one London office floor, paying about $1.2m; it estimated this would reduce lease obligations by about $3.6m over fiscal 2013–2016. Foreign-exchange sensitivity analysis indicated a hypothetical 10% rate movement would not have a significant earnings or cash-flow impact; no derivatives were outstanding.
- Key risks include dependence on key consultants and experts, project and utilization volatility, client and engagement concentration, competition for talent, economic and regulatory conditions, collectability of receivables and unbilled services, foreign operations, and potential goodwill impairment. The filing reported no legal proceedings and effective disclosure controls.
Investor verification priorities
- Track revenue, utilization and margins after the announced practice closures and staffing reductions, including realized savings versus restructuring costs.
- Monitor conversion of unbilled services to billings and cash collections, and the drivers of operating cash outflow.
- Assess goodwill impairment indicators given the stock-price decline and the $141.0m goodwill balance.
- Verify the ultimate restructuring charge, forgivable-loan issuance and repayment terms, and any performance-award payment.
- Review liquidity, cash concentration, revolving-facility covenant compliance and the pace and funding of share repurchases.