CRA International, Inc. — FY2014 Form 10-K
Business context and reporting period. CRA provides litigation, regulatory, financial, and management consulting services, with NeuCo software operations contributing about 2% of revenue. This annual report covers the fiscal year ended January 3, 2015, a 53-week year, compared with 52 weeks in FY2013. The filing also reports fourth-quarter results.
Key financial metrics
- Revenue: $306.4 million, up 10.0% from $278.4 million. Litigation/regulatory/financial and management consulting both grew, primarily through organic expansion.
- Profitability: Gross profit was $99.6 million (32.5% margin); operating income was $24.0 million (7.8% margin); net income attributable to CRA was $13.6 million, or $1.38 diluted EPS (4.5% of revenue). The effective tax rate was 42.5%.
- Cash flow: Operating cash flow was $30.2 million; investing used $5.9 million and financing used $25.9 million. Cash declined $3.1 million to $48.2 million.
- Liquidity and debt: Working capital was $76.8 million. No borrowings were outstanding on the $125 million revolving facility; $1.3 million of letters of credit reduced availability. Notes payable were $981,000. Management said available cash, operating cash flow, and credit availability should cover anticipated needs for at least 12 months.
- Other indicators: Consultant utilization rose to 76% from 73%; DSO increased to 99 days from 94. Fixed-price engagements were 15% of revenue versus 13%. Share repurchases totaled $25.5 million for 971,515 shares.
Material changes versus FY2013
- Revenue increased $27.9 million; the additional fiscal week contributed to the comparison, and utilization improved by 3 percentage points.
- Gross margin improved to 32.5% from 32.0%; SG&A declined to 22.5% of revenue from 23.1%. Operating income rose to $24.0 million from $18.5 million, and CRA-attributable net income rose to $13.6 million from $11.4 million.
- Operating cash flow increased to $30.2 million from $18.4 million. Cash was nevertheless lower, mainly reflecting bonus payments, higher DSO, and repurchases.
- FY2014 diluted EPS increased to $1.38 from $1.12; diluted weighted-average shares fell to 9.9 million from 10.2 million, primarily due to repurchases.
- FY2014 fourth-quarter revenue was $78.5 million versus $75.7 million in the prior-year quarter; CRA-attributable net income was $3.8 million versus $3.7 million.
Outlook, risks, contingencies, and unusual items
- No specific revenue or earnings guidance was provided. Management stated it expects to continue repurchasing shares; approximately $20.9 million remained authorized at year-end.
- Key business risks include dependence on retaining and recruiting senior consultants and outside experts, utilization and billing rates, project cancellations and large engagements, competition, client collections, fixed-price project overruns, and economic, regulatory, foreign-exchange, and cybersecurity risks.
- Control weakness: Management and Ernst & Young concluded internal control over financial reporting was ineffective at January 3, 2015 because controls over non-routine compensation arrangements, including share-based compensation, were materially weak. The auditor issued an adverse ICFR opinion but an unqualified opinion on the financial statements. A prior income-tax control weakness was reported as remediated.
- A non-cash tax expense of about $0.8 million corrected an immaterial prior-period deferred-tax error. The FY2014 effective tax rate also reflected prior-period adjustments and other discrete tax items.
- No goodwill impairment was recorded in FY2014; the company retained $82.3 million of goodwill. FY2012 included a non-cash $71.4 million goodwill impairment charge.
- Operating lease commitments totaled $59.4 million. A February 2015 amendment added 10,057 square feet of Boston office space through June 2020, with an extension option. Legal proceedings were reported as none.
Important facts for investors to verify
- Progress and effectiveness of the remediation plan for the material weakness in compensation accounting and reporting.
- How much FY2014 revenue and earnings growth reflects the extra fiscal week versus underlying demand and utilization.
- Whether DSO, receivables quality, and cash conversion improve, and the timing and cash impact of the approximately $49 million accrued FY2014 bonuses.
- Tax-rate sustainability, tax audit outcomes, and the effect of outstanding valuation allowances and tax positions.
- Capital allocation: continued buybacks, remaining authorization, and resulting share-count changes.