Business context and reporting period
CRA International, Inc. provides litigation, regulatory, financial and management consulting services, with a small software business, NeuCo. This Form 10-K covers the 52-week fiscal year ended December 29, 2012; it is an annual report, not a standalone fourth-quarter filing. Fiscal 2011 was also a 52-week year.
Financial performance and position
Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $270.4 | $305.2 |
| Gross profit / margin | $88.0 / 32.5% | $105.8 / 34.7% |
| Operating income (loss) | $(57.8) | $29.1 |
| Net income (loss) attributable to CRA | $(53.0); $(5.21) per diluted share | $16.9; $1.57 per diluted share |
| Cash from operating activities | $(8.5) | $30.0 |
| Cash and cash equivalents at year-end | $55.5 | $61.6 |
| Working capital at year-end | $102.5 | $107.7 |
- Revenue fell 11.4%; utilization declined to 68% from 74%.
- At year-end, total assets were $292.0 million and shareholders’ equity was $212.2 million. Long-term notes payable were $1.0 million; the $60 million revolving credit facility had no balance drawn. The facility matures April 30, 2014.
- Capital expenditures were $2.7 million. Net cash used in investing activities was $12.8 million, including purchases and sales of short-term investments.
- Operating margin was negative 21.4%, including the goodwill impairment; the impairment represented 26.4% of revenue. Excluding that charge, operating income would have been approximately $13.6 million, or 5.0% of revenue.
Material changes and unusual items
- A $71.4 million non-cash goodwill impairment in Q4 followed a sustained decline in the company’s share price; goodwill ended the year at $70.8 million. Q4 revenue was $67.5 million and CRA-attributable net loss was $53.5 million.
- FY 2012 included $6.7 million of restructuring charges. CRA eliminated its Chemicals practice, closed Middle East operations, repositioned other underperforming practices and reduced more than 60 consulting positions. Utilization and revenue were affected by these actions and the underperformance preceding them.
- Gross margin contracted by 2.2 percentage points as revenue declined faster than service costs. Costs also included $3.8 million of restructuring charges; SG&A included $1.5 million of restructuring charges.
- Cash used in operations included payment of prior-year bonuses and $19.9 million of cash absorbed by increases in prepaid expenses and other assets, primarily employee and expert loans and advances. The allowance for receivables rose to $9.5 million from $6.5 million.
- CRA repurchased 466,109 shares for $9.1 million during the year. No cash dividends were paid, and management said it did not anticipate dividends in the foreseeable future.
Outlook, management commentary and risks
- Management stated that cash, operating cash generation and available credit were expected to meet working-capital and capital expenditure needs for at least 12 months. It anticipated borrowing about $25 million under the revolver during the first half of fiscal 2013, repaying it by year-end, and maintaining approximately $10 million of minimum cash. This is liquidity commentary, not revenue or earnings guidance.
- Management expected higher amortization expense in fiscal 2013 from increased forgivable loans to certain revenue-producing employees and experts, while expecting their revenue contribution to more than offset the added expense.
- Key risks include retaining and recruiting senior consultants and outside experts, dependence on antitrust and M&A-related work and large engagements, client termination or payment risk, utilization and seasonal swings, fixed-price project cost overruns, competition, international operations and covenant-constrained borrowing.
- Management identified further goodwill impairment as a risk if market value remains below book value. The company also disclosed an IRS examination expanded to fiscal 2009, 2010, the transition period and 2011; settlement options were under consideration, and management considered its reserves adequate.
- After year-end, an approximately 40-person litigation consulting team joined CRA effective February 1, 2013; the transaction included certain intangible assets, receivables and ongoing client projects. Purchase-price allocation was not final.
- The company reported no legal proceedings in Item 3. Management and the auditor reported effective internal control over financial reporting; the financial statement audit opinion was unqualified.
Important facts for investors to verify
- Assess the assumptions and valuation inputs behind the $71.4 million goodwill impairment and the remaining $70.8 million goodwill balance.
- Track whether restructuring and practice repositioning restore utilization, revenue growth and operating margins after the FY 2012 decline.
- Compare the projected FY 2013 revolver borrowing and repayment with actual cash flow, bonus payments, acquisition spending and the stated minimum cash balance.
- Monitor receivable collection trends, the $9.5 million allowance, and the scale and collectability of employee and expert loans.
- Review the results of the IRS examination and the integration, costs and performance of the post-year-end consulting team.