CRA International, Inc. — Form 10-Q Summary
Business context and reporting period
CRA provides litigation, regulatory, financial, and management consulting services, operating as Charles River Associates. The filing covers the quarter and first half of fiscal 2014 ended June 28, 2014, compared with periods ended June 29, 2013. This differs from the request metadata describing 2013 Q2.
Financial performance
| Metric | Q2 FY2014 | Q2 FY2013 | First half FY2014 | First half FY2013 |
|---|---|---|---|---|
| Revenue | $78.2 million | $65.2 million | $154.4 million | $128.3 million |
| Gross profit / margin | $25.5 million / 32.6% | $20.2 million / 30.9% | $49.9 million / 32.3% | $41.3 million / 32.2% |
| Operating income / margin | $6.5 million / 8.3% | $3.2 million / 4.9% | $12.1 million / 7.8% | $6.9 million / 5.4% |
| Net income attributable to CRA | $3.2 million | $1.4 million | $6.6 million | $4.4 million |
| Diluted EPS | $0.32 | $0.14 | $0.66 | $0.43 |
Revenue grew 19.9% in the quarter and 20.3% year to date. Management attributed growth to momentum continuing from late FY2013, organic growth, and contributions from senior hires. Utilization rose to 78% from 67% in both comparison periods. Quarterly operating margin improved as revenue growth outpaced service and administrative cost growth.
First-half net cash used in operating activities was $15.2 million, versus $25.7 million used in the prior-year period. Cash declined $23.6 million to $27.6 million. Management cited payment of most FY2013 bonuses, higher days sales outstanding (108 days versus 94 at FY2013 year-end), and share repurchases as key cash uses. Investing cash use was $2.9 million; financing cash use was $5.5 million, including $5.4 million of share repurchases.
At June 28, 2014, current assets were $154.6 million and current liabilities $70.1 million, with reported working capital of $84.5 million. Notes payable were $1.0 million; no borrowings were outstanding on the $125 million revolving facility, with $1.4 million of letters of credit reducing availability. The company reported compliance with credit covenants. Total assets were $307.0 million and shareholders’ equity was $229.1 million.
Material changes and notable items
- Q2 revenue from fixed-price engagements rose to 18% of total revenue from 14%; first-half share was 15% versus 14%. International revenue was 21% of quarterly revenue and 23% of first-half revenue, broadly unchanged year over year.
- In Q2, CRA recorded approximately $0.8 million of noncash tax expense to correct an error in the valuation of deferred tax assets in previously issued statements. Management concluded the error was not material to prior periods. Effective tax rates were 50.0% for Q2 and 44.7% for the first half, versus 59.9% and 37.9%, respectively, in the prior-year periods.
- Disclosure controls and procedures were deemed ineffective at June 28, 2014 because of a material weakness in income-tax accounting and reporting. Management nevertheless stated the interim financial statements fairly present the company’s financial position and results.
- CRA repurchased 252,600 shares in the first half at an average $21.91 per share; approximately $10.9 million remained authorized for future repurchases. Share count declined year over year.
- CRA held $45.3 million in forgivable loans to employees and non-employee experts in other assets, and expected to issue an additional $4.1 million under existing commitments before the end of Q3 FY2014. The loans generally forgive over three to eight years subject to continued service and other conditions.
Outlook, risks, and contingencies
Management stated that cash, operating cash generation, and the available credit line should cover anticipated working capital and capital expenditures for at least 12 months. No quantitative earnings or revenue guidance is provided in the filing. CRA said it expects to continue share repurchases. No restructuring charges were recorded in the first half; the remaining restructuring reserve was $0.7 million. The filing reports no legal proceedings.
Principal risks include retention and recruitment of key consultants and non-employee experts, project-based demand and utilization, dependence on large engagements and antitrust/M&A activity, client payment and receivable collection, fixed-price project estimation, competition, acquisitions, foreign exchange exposure, and potential professional-liability claims. A hypothetical 10% foreign-exchange movement would have affected Q2 pretax income by approximately $0.2 million; no derivatives were outstanding. Cash was substantially concentrated at one financial institution, a potential credit risk noted by the company.
Important facts for investors to verify
- Confirm the period: the filing is for Q2 FY2014, ended June 28, 2014, not Q2 2013.
- Track the remediation and effectiveness of controls over income-tax accounting, and any related tax or deferred-tax adjustments.
- Monitor receivables, unbilled services, DSO, and operating cash conversion given first-half operating cash outflow.
- Assess whether higher utilization and revenue growth persist and translate into sustainable margins, particularly as incentive compensation and hiring costs change.
- Review the scale, terms, and collectability of forgivable loans and future committed payments, alongside repurchases and remaining credit availability.