CRA International, Inc. — Q3 2013 Form 10-Q
Business and period: CRA provides litigation, regulatory and financial consulting, and management consulting services as Charles River Associates. This unaudited report covers the quarter and fiscal year-to-date period ended September 28, 2013; comparatives are the quarter and year-to-date period ended September 29, 2012.
Financial performance
| Metric | Q3 2013 | Q3 2012 | FYTD 2013 | FYTD 2012 |
|---|---|---|---|---|
| Revenue | $74.4 million | $65.9 million | $202.8 million | $202.9 million |
| Gross profit / margin | $23.9 million / 32.0% | $19.7 million / 29.9% | $65.1 million / 32.1% | $64.7 million / 31.9% |
| Operating income / margin | $6.1 million / 8.2% | $1.0 million / 1.6% | $13.1 million / 6.4% | $7.1 million / 3.5% |
| Net income attributable to CRA | $3.3 million | $(0.7) million | $7.6 million | $0.5 million |
| Diluted EPS | $0.32 | $(0.07) | $0.75 | $0.05 |
| Cash from operations | Not separately presented by quarter | $(18.2) million | $(22.8) million |
Quarterly revenue rose 12.9%, led by litigation, regulatory and financial consulting, organic growth and new senior hires. Utilization increased to 78% from 67%. Management consulting revenue remained below the prior-year quarter but improved sequentially as backlog strengthened. FYTD revenue was essentially flat; utilization was 70%, compared with 69%.
Quarterly improvement reflected higher revenue and lower costs as a percentage of revenue, as well as the absence of prior-year restructuring charges. FYTD SG&A declined 9.1% to $47.3 million, while FYTD operating income increased to $13.1 million. FYTD net income also benefited from a favorable tax matter settlement in Q1; the filing notes a $0.3 million discrete tax adjustment in Q2.
Financial position and liquidity
- Cash and equivalents were $17.9 million at September 28, 2013, down $37.5 million from $55.5 million at December 29, 2012. Working capital was $71.7 million.
- FYTD operating cash outflow was $18.2 million. Investing cash outflow was $18.1 million, including $15.6 million of acquisition consideration and $2.5 million of capital expenditures. Financing cash outflow was $1.3 million.
- Cash use included a $19.4 million increase in prepaid and other assets, principally reflecting approximately $38.1 million of forgivable loans and advances issued to employees and non-employee experts; CRA recorded $9.8 million of forgivable-loan amortization.
- CRA had no revolver borrowings outstanding and approximately $124.6 million available under its $125 million revolving facility, net of $0.4 million in letters of credit. Notes payable totaled $1.0 million. CRA reported compliance with credit-agreement covenants.
- Total assets were $299.4 million and shareholders’ equity was $221.6 million. Forgivable and term loans to employees and experts totaled approximately $55.2 million across current and non-current asset categories.
Changes, outlook and risks
- A litigation consulting team of approximately 40 people joined CRA effective February 1, 2013. The acquisition was described as not material; purchase accounting was ongoing. CRA also reported $5.4 million of acquisition-related goodwill adjustments.
- There were no restructuring charges in the 2013 quarter or FYTD period, compared with $6.3 million of FYTD restructuring charges in 2012. The prior-year charges included practice restructuring and office-space actions.
- Management stated that cash, operating cash generation and available credit were expected to meet anticipated working-capital, capital-expenditure and contingent-consideration needs for at least the next 12 months. The filing gives no specific revenue or earnings guidance.
- Key risks include dependence on key consultants and non-employee experts, recruiting and retention costs, engagement timing and utilization, client concentration and collections, competition, economic and regulatory conditions, fixed-price project execution, acquisition integration, foreign-exchange exposure, and potential goodwill impairment. The company recorded a $71.4 million non-cash goodwill impairment in Q4 2012; no goodwill impairment was recorded in the periods reported here.
- CRA disclosed that a substantial portion of cash was held at one financial institution. A hypothetical 10% foreign-exchange movement was estimated to affect Q3 pretax income by about $0.1 million. No derivatives were outstanding. No legal proceedings were reported.
Important facts for investors to verify
- Whether improving management consulting backlog and higher utilization persist, and whether litigation-consulting growth is sustained.
- Whether cash conversion improves after the large employee and expert loan advances and increases in unbilled services.
- The repayment, forgiveness and collectability profile of the approximately $55.2 million in employee and expert loans, including related compensation expense.
- Continued compliance with credit covenants and the liquidity available after letters of credit and any future borrowing.
- The sustainability of reported earnings given the prior-year restructuring comparison and favorable FYTD tax settlement.
- Goodwill impairment exposure, given the prior-year charge and the company’s reliance on market capitalization in its impairment analysis.