CRA International, Inc. — Form 10-Q Summary
Period: Fiscal quarter ended March 29, 2014; comparative quarter ended March 30, 2013. The request metadata says “2013 Q1,” but the filing covers Q1 fiscal 2014.
Business context
CRA is a consulting-services firm operating as Charles River Associates, serving clients through litigation, regulatory and financial consulting and management consulting. It reports one business segment.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $76.2 million | $63.1 million |
| Gross profit / margin | $24.4 million / 32.0% | $21.1 million / 33.4% |
| Operating income / margin | $5.6 million / 7.4% | $3.8 million / 6.0% |
| Net income attributable to CRA | $3.4 million | $3.0 million |
| Diluted EPS | $0.34 | $0.29 |
| Operating cash flow | $(14.5) million | $(7.9) million |
- Revenue rose 20.8%, reflecting growth in both consulting businesses, continued momentum from late fiscal 2013, and higher utilization (78% versus 67%). Management also cited contributions from senior-level hires and higher reimbursable expenses, which generally carry little to no margin.
- Costs of services increased 23.4%; gross margin declined 1.4 percentage points, primarily due to higher incentive compensation and reimbursable expenses. SG&A rose 8.6% in dollars but fell as a share of revenue, to 22.5% from 25.0%.
- Income tax provision increased to $2.1 million from $0.5 million; the effective tax rate was 38.6% versus 16.0%. The prior-year rate benefited from UK net operating losses and a favorable tax settlement. CRA’s net income rose, but attributable net margin was about 4.5%, versus 4.7%.
- Cash and cash equivalents were $32.5 million at quarter-end, down $18.8 million from fiscal year-end; working capital was $74.5 million. Operating cash use mainly reflected payment of fiscal 2013 performance bonuses and increased unbilled services.
- Investing cash use was $2.0 million, including $1.5 million of net acquisition consideration and $0.4 million of capital expenditures. Financing cash use was $2.3 million, principally $2.1 million for share repurchases.
- CRA had $0.991 million of notes payable, no revolver borrowings, and a $125 million revolving facility, reduced by $1.4 million of letters of credit. Management said cash, operating cash generation and available credit should meet anticipated needs for at least 12 months.
Changes, outlook and material matters
- Revenue and operating income improved year over year, while gross margin and attributable net margin declined. Cash use from operations increased year over year.
- No quantitative revenue or earnings guidance is provided. Management expects continued share repurchases and believes liquidity is adequate for at least the next 12 months.
- CRA repurchased 95,600 shares during the quarter at an average $22.25; approximately $14.3 million remained authorized for future repurchases.
- CRA issued approximately $5.0 million in forgivable loans to employees and non-employee experts during the quarter and expected to fund a further approximately $4.3 million of loan commitments by the end of Q3. Forgiveness depends on continued service and contractual compliance.
- A new Boston office lease signed in February 2014 covers 57,602 square feet for a 10-year base term beginning when fixed rent starts, expected in Q3 fiscal 2015. First-year base rent is approximately $2.4 million, excluding operating costs.
- Management reported no goodwill impairment or restructuring charges in the quarter. A substantial portion of cash was held at one financial institution, creating concentration risk; CRA reported no losses and considered the funds liquid.
- Foreign currency exposure is managed primarily through settlement of intercompany balances and self-hedging; no derivatives were outstanding. A hypothetical 10% currency movement would have affected quarterly pretax income by approximately $0.3 million.
- Disclosure controls and procedures were deemed ineffective because of a previously identified material weakness in income-tax accounting and reporting. Management nevertheless concluded the interim financial statements were fairly presented; remediation was ongoing.
- Other stated risks include dependence on key consultants and experts, engagement volatility and client concentration, competition for talent, client payment and collection risks, acquisition and goodwill risks, and professional liability. No legal proceedings were reported.
Important facts for investors to verify
- Whether consultant utilization and revenue momentum continued, and whether growth is organic or dependent on hiring and pass-through expenses.
- Whether incentive compensation and reimbursable costs continue to pressure gross margin, and how the unusually higher tax rate affects subsequent earnings.
- Cash conversion, collections and unbilled services, including the timing of bonus payments and the planned forgivable-loan disbursements.
- Progress and effectiveness of remediation of the income-tax controls material weakness.
- Terms and future costs of the Boston lease, as well as share repurchases, loan commitments and compliance with credit-facility covenants.