CRA International, Inc. — Q2 2013 Form 10-Q
Business context and reporting period. CRA provides litigation, regulatory, financial, and management consulting services through one consulting-services segment, operating as Charles River Associates. This unaudited report covers the quarter ended June 29, 2013 and the fiscal year-to-date first half, compared with the periods ended June 30, 2012.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $65.2m | $67.8m | $128.3m | $136.9m |
| Gross profit / margin | $20.2m / 30.9% | $22.4m / 33.0% | $41.3m / 32.2% | $45.0m / 32.9% |
| Operating income / margin | $3.2m / 4.9% | $2.8m / 4.1% | $6.9m / 5.4% | $6.1m / 4.5% |
| Net income attributable to CRA / diluted EPS | $1.4m / $0.14 | $0.7m / $0.07 | $4.4m / $0.43 | $1.2m / $0.12 |
| Operating cash flow | Not separately presented for the quarter | $(26.7)m | $(27.0)m |
Revenue and profitability. Revenue declined 3.8% in Q2 and 6.3% in the first half. Management attributed the decline mainly to weaker management consulting, partly offset by stronger litigation, regulatory, and financial consulting. Q2 utilization fell to 67% from 70%; first-half utilization was 67% versus 69%. Higher pass-through reimbursable expenses also weighed on gross margin. Lower SG&A and depreciation, including savings from prior restructuring and office reductions, supported higher operating income despite lower revenue.
Cash, liquidity, and debt. Cash and equivalents were $16.3m at June 29, down $39.1m from year-end; working capital was $65.2m. First-half operating cash use was $26.7m, investing cash use $17.5m (including $15.6m net acquisition consideration), and financing cash provided $5.1m. The company reported $5.1m outstanding on its new $125m revolving facility and $0.5m of letters of credit; it repaid a further $4.0m on July 23, leaving about $1.1m outstanding. Notes payable were $1.7m in total. The facility matures April 24, 2018; CRA said it was covenant-compliant and expected cash, operating cash generation, and facility availability to cover at least 12 months of needs.
Material changes and notable items
- Q2 net income attributable to CRA rose to $1.4m from $0.7m; first-half income rose to $4.4m from $1.2m. Lower prior-year comparative earnings included much higher tax expense; first-half 2013 benefited from a favorable tax settlement in Q1.
- Effective tax rates were 59.9% in Q2 2013 and 37.9% for the first half, versus 71.3% and 79.7%, respectively, in the prior-year periods. Q2 2013 included a one-time $0.3m tax adjustment; foreign losses without tax benefits also affected rates.
- CRA issued approximately $38.0m of forgivable loans to employees and non-employee experts in the first half, principally to attract and retain talent. These loans are generally forgiven over three to eight years subject to continued service and contractual conditions. Related cash outlays were a major driver of the increase in other assets and operating cash use.
- An approximately 40-person litigation consulting team joined CRA effective February 1, 2013. CRA acquired certain intangible assets, receivables, and ongoing client projects; the acquisition was described as not material. Purchase accounting remained subject to finalization.
- CRA recorded no restructuring charges in Q2 2013; the remaining restructuring reserve was $1.5m. The company had recorded a $71.4m non-cash goodwill impairment in Q4 2012; no goodwill impairment was recorded in the periods reported here.
Outlook, risks, and contingencies
CRA provided no quantified revenue or earnings guidance. Management said management-consulting backlog improved toward the end of Q2 and that the improvement continued into Q3. It also noted ongoing strength in certain litigation, regulatory, and financial consulting practices. These comments are not a formal forecast.
Key disclosed risks include dependence on key consultants and non-employee experts, employee and expert retention, variable utilization and project timing, client and large-engagement concentration, competition, fixed-price project estimation, and economic or regulatory changes affecting demand. Forgivable-loan defaults or collection shortfalls could adversely affect results and liquidity. Other risks include foreign-currency exposure, client nonpayment, acquisition integration, professional liability, and potential future goodwill impairment. A hypothetical 10% foreign-exchange movement was estimated to affect Q2 pretax income by about $0.1m; no derivatives were outstanding at quarter-end. CRA reported no legal proceedings and stated its disclosure controls were effective.
Important facts for investors to verify
- Whether improved management-consulting backlog translated into sustained revenue growth and stronger utilization after quarter-end.
- The scale, terms, forgiveness schedule, collectability, and compensation-expense effects of the $38.0m employee and expert loan issuance.
- Cash conversion and working-capital trends, particularly unbilled services, receivables, and bonus-related payments.
- The effective tax rate going forward, separating the Q1 tax settlement and Q2 one-time adjustment from recurring tax effects.
- Credit-facility availability and covenant headroom, as well as the potential for renewed goodwill impairment if market value remains weak.