CRA International, Inc. — Form 10-Q Summary
Period: Fiscal quarter and year-to-date ended June 29, 2019, compared with periods ended June 30, 2018. The request metadata says “2018 Q2,” but the filing itself reports fiscal 2019 Q2.
Business context
CRA is a global consulting firm providing litigation, regulatory and financial consulting, and management consulting. It reports one business segment. All dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $110.6 | $105.5 | $216.4 | $205.0 |
| Operating income | $8.3 | $9.7 | $15.2 | $15.9 |
| Net income | $5.6 | $6.8 | $10.2 | $11.7 |
| Diluted EPS | $0.68 | $0.79 | $1.23 | $1.35 |
| Operating margin | 7.5% | 9.2% | 7.0% | 7.7% |
| Net margin | 5.0% | 6.5% | 4.7% | 5.7% |
Q2 revenue rose 4.8%, while operating income fell about 14% and net income fell about 18%. First-half revenue increased 5.6%, but operating income declined about 4% and net income declined about 13%. Higher service costs, particularly incentive and retention compensation, contributed to lower margins. Q2 utilization declined to 77% from 79%; consultant headcount increased 5.7% to 664. First-half utilization was 76%, flat year over year.
Q2 fixed-price engagements were 23% of revenue versus 20% a year earlier; first-half share was 22% versus 20%. Foreign exchange reduced Q2 revenue by $1.2 and first-half revenue by $2.7; the comparable 2018 periods benefited by $1.2 and $3.4, respectively.
Cash flow, balance sheet and debt
- First-half operating cash flow was negative $46.1, compared with negative $32.8 in 2018. The filing attributes the outflow mainly to paying a substantial portion of fiscal 2018 performance bonuses, increased forgivable loans, and working-capital movements.
- Investing cash outflow was $3.9, primarily capital expenditures. Financing provided $27.4, including $41.0 net borrowing on the revolving facility, alongside $11.5 of share repurchases and $3.2 of dividends.
- Cash was $15.6 at June 29, down from $38.0 at fiscal year-end. Working capital was $12.7. Current assets were $165.5 and current liabilities $152.8.
- CRA had $41.0 outstanding on its $125.0 revolving facility; $4.1 of letters of credit also reduced availability. It was in covenant compliance. The company said the borrowings were expected to be repaid within 12 months; a subsequent $9.0 repayment in July left $32.0 outstanding.
- Operating lease liabilities were $138.2, with $114.7 of right-of-use assets. Adoption of ASC 842 added $82.3 of right-of-use assets and $106.8 of lease liabilities at transition; management said adoption did not materially affect results, cash flows, or debt covenants.
Outlook, risks and notable items
- Management expects cash, operating cash generation and available revolver capacity to meet anticipated working-capital and capital needs for at least 12 months. No specific revenue or earnings guidance is provided.
- Management anticipates regular quarterly dividends and continued repurchases, subject to Board discretion and available resources. The Board declared a $0.20 per-share dividend payable September 13, 2019.
- CRA disclosed that disclosure controls and procedures were not effective at quarter-end because of material weaknesses involving contingent consideration and incentive compensation, revenue and related reserves, certain payables and expense accruals, and evaluation of certain tax matters. Management nevertheless concluded the financial statements fairly present the company’s financial position and results. Remediation efforts were ongoing.
- Legal actions arise in the ordinary course; management did not expect pending matters to materially affect financial position or results, while noting outcomes are uncertain. The filing states there was no material change to previously disclosed risk factors.
- CRA reported an immaterial prior-period cash-flow classification correction with no effect on previously reported net cash used in operating activities. It also reported $21.1 of commitments for office leases not yet commenced.
Investor verification priorities
- Reconcile revenue growth with declining utilization and operating margins, and track incentive and retention compensation costs.
- Monitor operating cash conversion, bonus payments, forgivable-loan advances, and the adequacy of liquidity given low cash and revolver borrowings.
- Verify progress in remediating the disclosed material weaknesses, especially controls over revenue reserves, incentive liabilities, accruals and tax matters.
- Assess lease obligations and new office commitments alongside planned dividends, repurchases and capital spending.
- Confirm the reporting-period discrepancy: the filing covers fiscal 2019 Q2, not 2018 Q2 as stated in the request metadata.