CRA International, Inc. — Form 10-Q Summary
Period discrepancy: Request metadata says 2015 Q2, but the filing is for the quarter ended July 2, 2016, with comparisons to the quarter ended July 4, 2015. Fiscal year-to-date figures cover the first half of each fiscal year. Financial amounts below are in millions unless otherwise noted.
Business context and results
CRA is a global consulting firm focused on litigation, regulatory and financial consulting, and management consulting. The filing reports unaudited consolidated results.
| Metric | Quarter ended July 2, 2016 | Quarter ended July 4, 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $82.6 | $76.5 | $163.5 | $154.6 |
| Gross profit / margin | $24.7 / 29.8% | $25.9 / 33.8% | $50.1 / 30.6% | $50.1 / 32.4% |
| Operating income / margin | $5.7 / 6.9% | $5.6 / 7.4% | $10.0 / 6.1% | $10.1 / 6.5% |
| Net income attributable to CRA | $5.2 | $3.3 | $7.6 | $6.1 |
| Diluted earnings per share | $0.59 | $0.36 | $0.86 | $0.65 |
Financial position, cash flow and liquidity
- First-half operating cash flow was negative $5.1 million, versus negative $16.6 million a year earlier. Investing cash flow was negative $5.7 million and financing cash flow was negative $15.7 million; cash fell $25.9 million to $12.2 million.
- Management attributed the cash decline principally to payment of prior-year performance bonuses, $15.1 million of share repurchases, and capital spending for new offices. First-half capital expenditures were $6.8 million.
- At July 2, 2016, current assets were $126.4 million and current liabilities were $69.9 million, yielding working capital of $56.5 million. Accounts receivable were $63.8 million and unbilled services were $30.1 million.
- No revolving-credit borrowings were outstanding. The company had a $125 million revolving facility, reduced by $2.1 million of letters of credit, and reported compliance with its covenants. It stated that cash, operating cash flow and facility availability should fund anticipated needs for at least 12 months.
- Total liabilities were approximately $91.1 million; the balance sheet showed no material funded debt outstanding. Forgivable loans totaled $40.9 million, including $8.4 million current.
Changes, unusual items and outlook
- Quarterly revenue rose 7.9%; first-half revenue rose 5.8%. Management cited higher consulting headcount (493 at quarter-end versus 447 a year earlier) and quarterly utilization of 76% versus 75%. First-half utilization declined to 75% from 77%.
- Costs of services grew faster than quarterly revenue, increasing to 70.2% of revenue from 66.2%; first-half costs also rose as a share of revenue. Management cited compensation, incentive and retention costs, and more revenue sourced by employees rather than nonemployee experts. This compressed gross and operating margins.
- Quarterly SG&A fell 9.7%, with lower Boston rent and other expense reductions; first-half SG&A declined 1.8%. Depreciation and amortization increased in both comparison periods.
- GNU sold substantially all business assets on April 13, 2016, and ceased operations. The sale generated a $3.8 million gain, of which $2.1 million was attributed to CRA; $1.1 million was received at closing, with another $0.25 million contingent and payable no earlier than April 13, 2017. The gain materially boosted reported pretax income and reduced the effective tax rate. The prior-year first half included a $0.6 million debt-extinguishment gain.
- CRA repurchased 672,795 shares in the first half at an average $24.09 per share; $11.9 million remained available under repurchase authorizations. Lower share counts contributed to higher EPS.
- CRA entered 15-year London office leases for 22,990 square feet. Fixed annual rent is £1.6 million in total after rent-free periods begin to expire in 2017 and 2018; rent can reset every five years based on market conditions.
- Management identified no material change in previously disclosed risk factors and gave no specific earnings or revenue forecast. It cautioned that forward-looking results could differ and that acquisitions, economic changes or unexpected costs could increase funding needs.
Risks, controls and contingencies
- Management concluded disclosure controls were not effective at July 2, 2016 because of a material weakness involving review and allocation of GNU income or loss to noncontrolling interest and other financial-close deficiencies. Remediation was ongoing. Management nevertheless stated the reported financial statements fairly presented results in all material respects.
- Cash was substantially concentrated at one financial institution; CRA reported no prior losses and considered the deposits liquid, but noted that a deterioration in the institution’s creditworthiness could affect liquidity.
- CRA reported ordinary-course legal actions, but management did not expect pending matters to materially affect financial position or results. The filing listed no legal proceedings under Part II and no material changes to previously disclosed risk factors.
- Financial results rely on estimates, including receivable allowances, fixed-price revenue recognition, compensation accruals, taxes and asset valuations; actual outcomes may differ. CRA was evaluating several new accounting standards, including revenue recognition and leases.
Most important facts for investors to verify
- Confirm the period: this filing covers fiscal Q2 2016, not Q2 2015.
- Assess underlying earnings excluding the GNU disposal gain and the effect of the noncontrolling interest allocation; verify the contingent $0.25 million sale consideration.
- Track utilization, headcount and compensation costs, given the decline in gross margin despite revenue growth.
- Review operating cash conversion, receivable and unbilled-service balances, and cash needs alongside repurchases and office commitments.
- Follow remediation of the material weakness and assess whether controls over the close and noncontrolling-interest calculations become effective.
- Verify continued covenant compliance and liquidity under the revolving facility, and monitor the terms and future rent adjustments of the London leases.