CRA International, Inc. — Q3 2011 Form 10-Q
Business and period: CRA provides litigation, regulatory, financial, and management consulting services through one business segment. The quarter ended October 1, 2011 (13 weeks); fiscal year to date (YTD) covers 39 weeks. The prior-year comparisons cover 16-week and 40-week periods, respectively, following a change in fiscal year-end, so reported period totals are not directly comparable.
Financial performance
| Metric | Q3 2011 | Q3 2010 | YTD 2011 | YTD 2010 |
|---|---|---|---|---|
| Revenue | $71.0m | $84.6m | $230.3m | $211.6m |
| Gross profit / margin | $24.4m / 34.4% | $29.8m / 35.2% | $78.4m / 34.0% | $66.2m / 31.3% |
| Operating income / margin | $6.2m / 8.8% | $4.9m / 5.8% | $21.1m / 9.2% | $5.3m / 2.5% |
| Net income attributable to CRA | $3.7m | $2.1m | $12.4m | $0.8m |
| Diluted EPS | $0.34 | $0.19 | $1.15 | $0.08 |
Cash flow and liquidity: YTD operating cash flow was $2.2m, versus $2.5m in the prior comparison period. Investing activities used $22.2m, including $6.3m of capital expenditure and net purchases of short-term investments; financing activities used $28.0m, mainly to retire debentures and repurchase shares. Cash and cash equivalents declined $48.0m to $39.5m; short-term investments were $14.8m. Working capital was $101.3m.
Debt: CRA repurchased its remaining $21.9m of convertible debenture principal in June 2011. At October 1, it had no revolver borrowings and $2.3m of notes payable. The $60m revolving facility, less $0.8m of outstanding letters of credit, was available subject to covenants; CRA reported covenant compliance.
Material changes and management commentary
- Q3 revenue fell 16.1% as reported, primarily reflecting three fewer weeks in the quarter; management also cited continued client spending caution and slower activity on several large management consulting projects. Utilization rose to 73% from 68%, while employee consultant headcount fell to 526 from 555.
- YTD revenue rose 8.8% despite one fewer week, which management attributed to demand growth and business-development investments, particularly in litigation and regulatory consulting. Utilization increased to 74% from 65%.
- YTD operating margin improved to 9.2% from 2.5%, supported by higher revenue, improved costs as a percentage of revenue, and lower restructuring costs. YTD SG&A included $1.0m of Houston office restructuring charges; no restructuring charge was recorded in Q3 2011.
- Interest expense declined following the debenture retirement. YTD effective tax rate was 38.6%, versus 74.6% in the prior comparison period; Q3 rates were 34.6% and 46.3%, respectively. Management cited tax benefits affecting the current-quarter rate.
- Management said cash, operating cash generation, and available credit should cover anticipated needs for at least 12 months. It gave no specific revenue or earnings guidance in the provided filing text.
Risks, contingencies, and unusual items
- DSO increased to 120 days from 102 days a year earlier; lower Q3 revenue also affected the measure. Receivables and unbilled services increased, contributing to low operating cash flow relative to net income.
- Client and engagement concentration increased: the 10 largest clients generated about 24% of YTD revenue versus 16% in the prior comparison period; the 10 largest engagements accounted for 16% versus 14%.
- Key-person retention, competition for qualified consultants, economic uncertainty, client concentration, project termination, fixed-price project cost overruns, and international operations are identified risks. Goodwill was $140.9m; no YTD impairment was recorded, but management planned its annual impairment assessment in Q4.
- A performance-based award related to a prior acquisition was estimated at $9.8m, subject to future performance and continued employment; any payment would be made in fiscal 2013.
- The company reported no legal proceedings. Cash concentration at one financial institution and collection risk were disclosed. Foreign-exchange and short-term investment interest-rate sensitivity analyses indicated no significant impact from the specified hypothetical changes.
Most important facts for investors to verify
- Normalize comparisons for the different quarter and YTD week counts before interpreting reported revenue and earnings changes.
- Track DSO, unbilled services, receivable allowances, and subsequent cash collections given the 120-day DSO and weak operating cash conversion.
- Assess whether higher utilization and YTD margin improvement continue, particularly as management consulting projects and client spending fluctuate.
- Review share repurchases, remaining authorization, liquidity needs, and the $9.8m contingent employee award.
- Monitor the Q4 goodwill impairment test, client concentration, and compliance with revolving-credit covenants.