CRA International, Inc. — Q3 2012 Form 10-Q
Reporting period: Fiscal quarter ended September 29, 2012; year-to-date results are compared with the corresponding periods ended October 1, 2011. CRA provides litigation, regulatory, financial, and management consulting services and reports one consulting-services segment.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Fiscal YTD 2012 | Fiscal YTD 2011 |
|---|---|---|---|---|
| Revenue | $65.9 million | $71.0 million | $202.9 million | $230.3 million |
| Gross margin | 29.9% | 34.4% | 31.9% | 34.0% |
| Operating income / margin | $1.0 million / 1.6% | $6.2 million / 8.8% | $7.1 million / 3.5% | $21.1 million / 9.2% |
| Net income (loss) attributable to CRA | $(0.7) million | $3.7 million | $0.5 million | $12.4 million |
| CRA diluted EPS | $(0.07) | $0.34 | $0.05 | $1.15 |
Revenue fell 7.2% in the quarter and 11.9% year to date. Management cited underperforming practices, lower utilization, reduced management consulting activity, and lower reimbursable expenses. Utilization declined to 67% from 73% in the quarter and to 69% from 74% year to date. Year-to-date revenue outside the U.S. declined to approximately 22% from 27%.
Quarterly operating results included $4.4 million of restructuring charges, including $3.4 million in costs of services and $1.0 million in SG&A. Costs of services and SG&A rose as a share of revenue, while depreciation and amortization also increased. The year-to-date effective tax rate was 92.8%, primarily because foreign losses generated no tax benefit; the quarterly rate was 169.5%.
Cash, liquidity, and debt
- Cash and cash equivalents were $42.3 million at September 29, 2012, down $19.3 million from year-end 2011; working capital was $104.3 million.
- Year-to-date operating cash flow was negative $22.8 million, versus positive $2.2 million in the prior-year period. Management attributed the use primarily to payment of prior-year performance bonuses, increased prepaid assets including employee and expert advances, and lower accrued liabilities.
- Investing activities provided $13.6 million, mainly from net sales of short-term investments; financing activities used $9.8 million, including $9.1 million for share repurchases.
- Notes payable totaled approximately $1.7 million. The $60 million revolving credit facility had no borrowings outstanding; $0.6 million of letters of credit reduced availability. CRA reported covenant compliance and said available cash, operating cash generation, and the facility should cover anticipated needs for at least 12 months.
- During Q3, CRA issued approximately $9.8 million of forgivable employee and expert loans for future service. Year-to-date share repurchases totaled 466,109 shares at an average $19.47 per share; $3.6 million remained authorized.
Material changes, outlook, and risks
- CRA eliminated its Chemicals practice, closed Middle East operations, repositioned other underperforming areas, and reduced more than 60 consulting positions while cutting administrative costs. Most actions were completed in Q3. Further actions and related costs were expected in Q4, but the company could not yet estimate the additional charge.
- Management warned that the stock-price decline could require a goodwill impairment in Q4 2012. No impairment had been recorded through September 29; any charge would be non-cash but could materially reduce earnings.
- No specific revenue or earnings guidance is provided. Management stated that liquidity was expected to be sufficient for at least the next 12 months.
- An acquisition-related employee award was estimated at $9.6 million, subject to performance and continued employment conditions; any payment was expected in Q1 2013.
- Key risks include consultant retention and utilization, client concentration and engagement cancellations, economic and M&A activity, competition, collection of receivables, international and foreign-exchange exposure, and fixed-price project cost overruns. A hypothetical 10% foreign-exchange movement was estimated to affect Q3 pretax income by approximately $0.1 million. No derivatives were outstanding.
- CRA reported no legal proceedings and stated that disclosure controls were effective.
Important facts for investors to verify
- Whether utilization and revenue stabilize after the practice closures and workforce reductions, and whether restructuring produces the intended margin improvement.
- The final Q4 restructuring costs and any offsetting savings; the filing says these costs and benefits were not finalized.
- The outcome of the annual goodwill impairment test, given the stock-price decline and stated possibility of a material charge.
- Cash conversion and working-capital trends, particularly rising days sales outstanding, unbilled services, receivable allowances, and the recoverability of employee and expert advances.
- The final amount and timing of the estimated $9.6 million employee award, and ongoing share repurchases relative to operating cash generation.