CRA International, Inc. — Form 10-K Summary
Period clarification: The filing provided is for the 52-week fiscal year ended December 30, 2017, with fiscal 2016 as the principal comparison. It is not a 2016 Q4 filing, although it includes quarterly results for Q4 2017 and Q4 2016. Financial amounts below are in U.S. dollars; annual statement amounts are rounded to millions.
Business context and reporting period
CRA provides economic, financial, litigation, regulatory, and management consulting services. It reports one consulting-services business segment. The company had 631 consultants at fiscal year-end. Its work is project-based and principally billed on a time-and-materials basis; fixed-price work increased to 25% of revenue from 17% in 2016. Consultant utilization was 74% in both years.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $370.1 million | $324.8 million |
| Operating income | $15.8 million | $18.9 million |
| Operating margin | 4.3% | 5.8% |
| Net income attributable to CRA | $7.6 million | $12.9 million |
| Diluted EPS | $0.89 | $1.49 |
| Operating cash flow | $45.9 million | $48.2 million |
- Revenue grew 13.9%, primarily reflecting management-consulting growth and the January 2017 acquisition of C1 Consulting, which added 84 consultants. Revenue outside the U.S. was 20%, versus 22% in 2016.
- Cost of services was $258.8 million, or 69.9% of revenue, broadly flat as a proportion of revenue. SG&A rose 22.5% to $86.5 million and increased to 23.4% of revenue from 21.7%.
- Net income fell despite revenue growth; the effective tax rate increased to 49.2% from 35.0%. Fiscal 2017 included a $3.6 million provisional tax expense for remeasurement of U.S. deferred taxes following the Tax Act.
- Cash and cash equivalents were $54.0 million, working capital was $62.3 million, and total assets were $361.8 million at year-end. Working capital declined from $76.4 million in 2016.
- There were no borrowings outstanding under the $125 million revolving credit facility; approximately $121.4 million was available after letters of credit. The company reported compliance with its credit covenants.
- Investing cash outflow was $25.7 million, including $16.2 million of cash consideration for C1 and $9.8 million of capital expenditures. Financing cash outflow was $21.9 million, including $19.5 million of share repurchases and $4.9 million of dividends.
Material changes and unusual items
- Fiscal 2017 SG&A included $5.7 million paid to IQVIA under a transaction agreement settling claims and addressing former employees’ employment arrangements. Higher professional and legal fees also contributed to SG&A growth.
- C1 acquisition consideration included cash, restricted CRA shares, and contingent earnout consideration. The year-end contingent consideration liability was $5.1 million. CRA recorded $12.994 million of goodwill and $8.5 million of acquired intangible assets from the acquisition.
- CRA recorded a $0.5 million impairment of intangible assets in 2017. No impairment was recorded for CRA consulting goodwill; the historical $4.5 million goodwill impairment related to GNU in 2015.
- GNU, whose business assets were sold in 2016, was dissolved in December 2017. A final distribution was expected in fiscal 2018.
- Q4 2017 revenue was $97.0 million versus $79.6 million in Q4 2016. Q4 2017 included an operating loss of $0.6 million and a net loss attributable to CRA of $2.3 million, compared with Q4 2016 operating income of $3.6 million and attributable net income of $2.1 million.
Outlook, risks, and contingencies
- Management said cash, operating cash flow, and available revolver capacity should fund anticipated working-capital and capital needs for at least 12 months. No specific revenue or earnings guidance was provided.
- Management expects to continue quarterly dividends and share repurchases, but both remain discretionary. After year-end, the board authorized another $20 million repurchase program and declared a $0.17-per-share dividend.
- Key operating risks include retention and recruitment of consultants and non-employee experts, utilization and billing rates, project timing and termination, fixed-price estimation, client collections, competition, conflicts of interest, cybersecurity and privacy, foreign currency exposure, and dependence on repeat and large engagements.
- Operating lease commitments totaled approximately $133.7 million, including $12.3 million due in fiscal 2018. A subsequent February 2018 lease surrender reduced future lease obligations by $2.7 million for a $525,000 fee.
- Significant control issue: Management concluded internal control over financial reporting and disclosure controls were not effective at year-end because of material weaknesses involving non-routine technical accounting and IT general controls over program changes. Weaknesses also affected revenue/reserve and compensation processes. The auditor issued an adverse opinion on internal control, while giving an unqualified opinion on the financial statements. Remediation was ongoing.
- The Tax Act accounting was provisional and incomplete at filing. CRA reported no expected transition-tax liability, but had not completed its analysis of potential GILTI effects. The company also adopted ASC 606 effective December 31, 2017, estimating a $0.3–$0.7 million after-tax increase to opening retained earnings.
- Management said ordinary-course legal matters were not expected to materially affect financial position or results; the filing’s Legal Proceedings item reported none.
Most important facts for investors to verify
- Whether the revenue growth from C1 and management consulting converts into improved operating margins, given the decline in operating margin and earnings.
- Q4’s operating and net losses, the full impact of the IQVIA payment and tax-law remeasurement, and whether these costs recur.
- Progress in remediating material weaknesses, particularly IT general controls and revenue, reserves, and compensation controls.
- Collection quality and reserve adequacy as receivables and unbilled services increased and receivable allowances rose.
- C1 earnout performance and contingent consideration, alongside the company’s substantial lease commitments and planned shareholder returns.
- Final tax effects of the Tax Act and the actual impact of adopting ASC 606.