Business context and reporting period
CRA International, Inc. (Charles River Associates) is a global consulting firm providing litigation, regulatory and financial consulting, and management consulting. It operates as one business segment. This Form 10-Q covers the quarter ended March 30, 2019, compared with the quarter ended March 31, 2018; the request metadata labels the period “2018 Q1,” but the filing is for 2019 Q1.
Key financial metrics
Amounts below are in millions except per-share data, percentages and where indicated.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $105.8 | $99.5 | +6.3% |
| Operating income | $6.9 | $6.2 | +10.5% |
| Operating margin | 6.5% | 6.2% | +0.3 percentage points |
| Net income | $4.7 | $4.9 | Down $0.2 |
| Diluted EPS | $0.56 | $0.57 | Down $0.01 |
| Effective tax rate | 23.5% | 17.5% | +6.0 percentage points |
| Net cash used in operations | $56.6 | $40.5 | Greater use of $16.0 |
Costs of services were $73.6 million (69.6% of revenue), versus $69.4 million (69.8%) a year earlier. SG&A was $22.7 million (21.5% of revenue), versus $21.7 million (21.8%). Cash and cash equivalents were $15.0 million at quarter-end, down from $38.0 million at December 29, 2018; working capital was $17.3 million.
Material changes versus the prior comparable period
- Revenue growth reflected a $7.9 million increase in gross revenue, partly offset by a $1.6 million increase in write-offs and reserves. Utilization rose to 75% from 73%; consultant headcount increased 6.2% to 687, and client service hours rose 11%.
- Operating income and operating margin improved, but net income and diluted EPS declined. The higher tax rate, primarily reflecting a reduced stock-compensation tax benefit, contributed to the net income decline.
- Foreign exchange reduced Q1 2019 revenue by $1.5 million; exchange-rate effects had increased Q1 2018 revenue by $2.2 million. Non-U.S. revenue was approximately 21% of total, compared with 23%.
- Operating cash outflow was driven chiefly by a $42.5 million decrease in accounts payable, accrued expenses and other liabilities, primarily reflecting payment of a significant portion of fiscal 2018 performance bonuses. Forgivable-loan funding also used $17.0 million of cash, net of amortization and other movements.
- CRA borrowed $39.0 million on its revolving credit facility during the quarter; there were no borrowings at year-end. It repurchased 86,609 shares for $4.3 million and paid $1.6 million in dividends.
Liquidity, debt, outlook and notable items
- The company has a $125 million revolving facility, with $39 million drawn and $3.9 million of letters of credit outstanding at March 30, 2019. CRA reported compliance with credit covenants; $86.1 million of nominal capacity remained before considering letters of credit. Borrowings are expected to be repaid within 12 months. In April, CRA borrowed an additional $6.0 million, also expected to be repaid within 12 months.
- Management said cash, operating cash generation and available credit should be sufficient for anticipated working-capital and capital needs for at least the next 12 months. The filing provides no numerical revenue or earnings guidance. Management expects regular quarterly dividends and continued share repurchases, subject to Board discretion and available resources.
- ASC 842 lease adoption added $82.3 million of right-of-use assets and $106.8 million of lease liabilities at transition. At quarter-end, lease liabilities totaled $104.5 million. CRA also disclosed $52.7 million of commitments for operating leases not yet commenced.
- Forgivable loans to employees and non-employee experts totaled $56.4 million, including $9.6 million current. These loans are generally forgiven over three to eight years subject to continued service and contractual conditions.
- Disclosure controls and procedures were deemed ineffective due to material weaknesses involving contingent consideration and incentive compensation, revenue and related reserves, certain payables and expense accruals, and technical tax matters. Management reported remediation efforts underway and stated that the financial statements fairly present the company’s results in all material respects.
- Management said pending ordinary-course legal actions were not expected to materially affect financial position or results, while noting their outcomes are inherently uncertain. No material change to previously disclosed risk factors was reported.
- The Board declared a $0.20-per-share quarterly dividend on May 2, 2019, payable June 14, 2019 to shareholders of record May 28, 2019. Other expense increased to $0.744 million from $0.241 million; the filing text provided here does not clearly identify the principal cause.
Important facts for investors to verify
- Confirm the reporting-period reference: the filing is Q1 2019, notwithstanding the “2018 Q1” metadata.
- Track operating cash conversion, bonus-related working-capital movements, unbilled services and forgivable-loan advances.
- Monitor revolving-credit borrowings, repayment timing, covenant headroom and the subsequent $6.0 million April draw.
- Assess the status and effectiveness of remediation for the disclosed material weaknesses in internal controls.
- Review lease commitments, including the $52.7 million of leases not yet commenced, and the implications for future cash requirements.
- Seek clarification on the drivers of higher other expense and evaluate the effect of changing tax benefits and foreign exchange on earnings.