CRA International, Inc. — Q1 2013 Form 10-Q
Business context and period: CRA provides litigation, regulatory, financial, and management consulting services through one reportable segment. This unaudited filing covers the fiscal quarter ended March 30, 2013; comparisons are with the quarter ended March 31, 2012.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / prior balance |
|---|---|---|
| Revenue | $63.1 million | $69.1 million |
| Gross profit / margin | $21.1 million / 33.4% | $22.6 million / 32.8% |
| Operating income / margin | $3.8 million / 6.0% | $3.3 million / 4.8% |
| Net income attributable to CRA | $3.0 million | $0.5 million |
| Diluted EPS | $0.29 | $0.05 |
| Net cash used in operating activities | $7.9 million | $21.1 million |
| Cash and cash equivalents | $30.6 million | $55.5 million at Dec. 29, 2012 |
| Working capital | $60.4 million | Not stated for comparison |
| Notes payable | $1.7 million total; no revolver balance at quarter-end | $1.7 million at Dec. 29, 2012 |
Cash used in investing activities was $16.9 million, including $15.7 million of net acquisition consideration and $1.2 million of capital expenditures. Cash declined by $24.9 million during the quarter. Total assets were $304.0 million and shareholders’ equity was $214.1 million at March 30, 2013.
Material changes versus the prior comparable quarter
- Revenue fell $6.0 million, or 8.7%, primarily because larger engagements were delayed. Utilization eased to 67% from 68%.
- Operating income increased despite lower revenue, reflecting lower service costs and SG&A following prior-year restructuring and reduced office costs. Gross margin improved 0.6 percentage points; operating margin improved 1.2 points.
- CRA-attributable net income rose to $3.0 million from $0.5 million. The effective tax rate fell to 16.0% from 86.6%, principally due to U.K. net operating loss carryforwards and a favorable tax settlement; the prior-year rate reflected foreign losses that generated no tax benefit.
- Other expense increased to $391,000 from $39,000, mainly due to unfavorable foreign-exchange movements.
- Cash from operations remained negative, though the outflow narrowed from $21.1 million. Payment of most fiscal 2012 performance bonuses and employee loan advances were significant cash uses.
Outlook, financing, and risks
- Management said cash, operating cash generation, and credit availability should cover anticipated working-capital and capital expenditure needs for at least 12 months. It expected senior hires’ full contribution to emerge as fiscal 2013 progressed.
- After quarter-end, CRA entered a new $125 million revolving credit facility, borrowed $15 million, and used the borrowing and cash on hand to repay the prior facility. Management anticipated repaying the borrowing by fiscal year-end and maintaining approximately $10–12 million of cash. The facility matures April 24, 2018, carries leverage-dependent pricing, has financial and non-financial covenants, and is secured by certain subsidiary equity interests.
- CRA had obligations to issue approximately $21.5 million of forgivable loans to employees and non-employee experts, with payment expected in Q2. Such loans are generally forgiven over service periods, subject to employment or affiliation conditions. The filing identifies default risk on these loans.
- An approximately 40-person litigation consulting team joined effective February 1, 2013. CRA acquired certain intangible assets, receivables, and ongoing client projects; the acquisition was described as not material.
- No restructuring charges were recorded in Q1 2013. CRA reported no goodwill impairment in the quarter, but disclosed a $71.4 million noncash goodwill impairment charge in Q4 2012 and continued monitoring impairment risk.
- Principal risks include dependence on key consultants and non-employee experts, engagement timing and utilization, client concentration and payment, competition, hiring and retention, fixed-price project estimation, foreign exchange, acquisitions, and potential goodwill impairment. No legal proceedings were reported. Management concluded disclosure controls were effective.
Investor verification priorities
- Whether delayed engagements converted to revenue and utilization and revenue trends improved after quarter-end.
- Cash conversion, including bonus payments, collection of receivables and unbilled services, and the timing and impact of the $21.5 million loan commitments.
- Revolver borrowings, repayment progress, covenant compliance, and the planned minimum cash balance under the new credit agreement.
- Tax-rate sustainability, given that Q1’s unusually low effective rate reflected specified tax benefits.
- Performance and integration of the new consulting team, and whether market capitalization or operating conditions raise further goodwill impairment concerns.