CRA International, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter ended March 28, 2020, compared with the quarter ended March 30, 2019. The request metadata says “2019 Q1,” but the supplied filing is for Q1 fiscal 2020. CRA provides litigation, regulatory, financial, and management consulting services and reports one business segment.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Revenue | $126.2 million | $105.8 million | Up 19.2%; U.S. revenue was $100.7 million and non-U.S. revenue was about 20% of total. |
| Operating income | $8.1 million | $6.9 million | Operating margin was 6.4%, versus 6.5%. |
| Net income | $6.5 million | $4.7 million | Net margin was 5.1%, versus 4.4%. |
| Diluted EPS | $0.80 | $0.56 | Weighted average diluted shares fell by approximately 309,000 to 8.037 million. |
| Operating cash flow | $(65.4) million | $(56.6) million | Cash use increased, primarily reflecting lower accrued liabilities, forgivable loan funding, and growth in unbilled services. |
| Investing cash flow | $(7.9) million | $(0.8) million | Capital spending chiefly funded office buildouts. |
| Financing cash flow | $64.1 million | $34.1 million | Included $70.0 million of revolving-credit borrowings. |
| Cash and equivalents | $15.8 million | $25.6 million at Dec. 28, 2019 | Quarter-end cash declined by $9.8 million. |
| Revolver borrowings | $70.0 million | None at Dec. 28, 2019 | $125.0 million facility; $4.4 million of letters of credit; reported borrowing availability was $50.6 million. |
Costs of services were 72.1% of revenue, up from 69.6%, pressuring operating margin. SG&A declined to 19.1% of revenue from 21.5%, partly offsetting that pressure. The effective tax rate rose to 29.4% from 23.5%. Lease liabilities totaled $156.5 million at quarter-end, including current and non-current portions.
Material changes versus the prior comparable quarter
- Revenue growth reflected a $19.7 million increase in gross revenue and $0.7 million less in write-offs and reserves. Consultant headcount increased 16.3% to 799, while utilization fell to 71% from 75%.
- Fixed-price work rose to 23% of revenue from 20%. Costs of services grew 23.6%, faster than revenue, including higher employee, incentive and retention compensation, forgivable-loan amortization, and reimbursable expenses.
- Foreign-currency results improved to a $1.4 million gain from a $0.7 million loss; currency translation adjustments were a $2.4 million loss in Q1 2020 versus a $0.7 million gain.
- CRA repurchased 82,613 shares for $3.8 million and paid $1.8 million in dividends. The board expanded the repurchase authorization by $20.0 million in February; approximately $19.7 million remained available at quarter-end.
- Forgivable loans increased to $72.0 million from $55.1 million at fiscal year-end, with $33.4 million of advances during the quarter.
Outlook, risks, and unusual items
- Management said COVID-19 had not materially adversely affected Q1 results, but warned that client demand, project timing, new project originations, and business operations could be disrupted. The magnitude and duration of any impact could not be reasonably estimated. CRA shifted to a stay-at-home and virtual-work model beginning March 16, 2020.
- Management stated that cash, operating cash flows, and available revolver capacity were expected to cover working capital and capital expenditures for at least 12 months. The filing gives no quantified earnings or revenue guidance; management cautioned that Q1 results may not indicate full-year results.
- CRA was in compliance with credit covenants at March 28, 2020. The facility requires an adjusted EBITDA-to-interest ratio above 2.5:1 and debt-to-adjusted EBITDA no higher than 3.0:1. Borrowings mature no later than October 24, 2022.
- Disclosure controls and procedures were deemed ineffective due to material weaknesses involving incentive-compensation liabilities, certain revenue and related-account controls, and completeness of certain accounts payable and expense accruals. Management said the financial statements fairly present results and described remediation as ongoing.
- Legal actions in the ordinary course were not expected by management to materially affect results, though outcomes are uncertain. The C1 acquisition contingent-consideration liability was $12.0 million, measured using significant unobservable inputs and payable before the end of Q2 fiscal 2021.
- CRA adopted the expected-credit-loss standard (ASC 326), recording a $0.2 million reduction to opening retained earnings. No material operating or cash-flow effect was reported at adoption.
Important facts for investors to verify
- How COVID-19 affected subsequent-quarter demand, utilization, project delays, and collections after the filing date.
- Whether operating cash flow improves as bonus-related accruals and forgivable-loan funding normalize, and how the $72.0 million loan balance performs.
- Revolver usage, available capacity, interest costs, and continued covenant compliance.
- Progress and effectiveness of remediation for the disclosed material weaknesses in internal controls.
- Whether the higher service-cost ratio and lower utilization persist, and how these trends affect margins.
- The filing’s stated cash availability and amounts: the balance sheet reports $15.8 million cash, while MD&A rounds cash to $15.9 million and reports $50.6 million of borrowing capacity.