CRA International, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 28, 2019 (52 weeks), compared with fiscal 2018 (52 weeks). The filing also reports fiscal Q4 2019; it is not a 2018 Q4 filing as suggested by the request metadata.
Business context
CRA is a global consulting firm providing litigation, regulatory and financial consulting, as well as management consulting. It operates as one business segment and primarily earns fees for consultant services. At year-end it employed 779 consultants. No client represented more than 5% of annual revenue.
Key financial metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $451.4 million | $417.6 million |
| Operating income / margin | $29.3 million / 6.5% | $28.9 million / 6.9% |
| Net income attributable to CRA | $20.7 million | $22.5 million |
| Diluted EPS | $2.53 | $2.61 |
| Operating cash flow | $27.8 million | $36.2 million |
| Cash and cash equivalents at year-end | $25.6 million | $38.0 million |
| Working capital | $12.7 million | $38.6 million |
- Revenue increased 8.1%; billable hours rose 5.6%, while consultant headcount increased by 92. Utilization eased to 75% from 76%.
- Cost of services was 70.4% of revenue, versus 69.2%; SG&A was 20.7%, versus 21.5%. Net income margin was 4.6%, versus 5.4%.
- Investing cash outflow was $16.7 million, primarily capital expenditures. Financing cash outflow was $23.8 million, including $18.1 million of share repurchases and $6.5 million of dividends.
- There were no borrowings under the $125 million revolving credit facility at year-end; $4.4 million of letters of credit reduced availability. The facility matures October 2022. Subsequent to year-end, CRA drew $30 million; the filing reported approximately $90.6 million available as of February 21, 2020.
- ASC 842 adoption added $130.2 million of right-of-use assets and $159.4 million of lease liabilities to the balance sheet. Total undiscounted operating lease payments were $194.7 million.
Material changes versus prior period
- Revenue grew, but operating margin declined and net income attributable to CRA fell 7.8%; diluted EPS declined 3.1%. Higher compensation, incentive and retention costs, forgivable-loan amortization, contingent-consideration expense and reimbursable expenses contributed to increased service costs.
- Operating cash flow declined to $27.8 million from $36.2 million. Cash fell by $12.4 million, reflecting bonus payments, forgivable-loan activity, repurchases, dividends and office buildout costs.
- Working capital decreased by $26.0 million, principally because of higher accrued expenses and recognition of current lease liabilities under the new lease standard.
- Revenue from fixed-price engagements rose to 24% of total revenue from 23%. U.S. revenue was $357.2 million; U.K. revenue was $72.2 million. Revenue outside the U.S. remained approximately 21% of the total.
- Fiscal Q4 2019 revenue was $119.3 million and net income was $4.8 million, with diluted EPS of $0.59. Fiscal Q4 2018 revenue was $108.8 million, net income attributable to CRA was $6.9 million, and diluted EPS was $0.81.
Outlook, risks and unusual items
- Management expects cash, operating cash flow and available credit to cover anticipated working-capital and capital needs for at least 12 months. No numerical revenue or earnings guidance is provided. CRA anticipated continuing quarterly dividends and share repurchases, subject to board discretion.
- Key business risks include retention and recruitment of consultants and non-employee experts, utilization and billing rates, project timing and termination, competition, fixed-price project estimation, client collections, and economic or regulatory changes. Brexit-related uncertainty and foreign-currency movements are also cited; a hypothetical 10% exchange-rate movement would have affected FY2019 pretax income by approximately $2.9 million.
- Material control issue: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end. Material weaknesses involved incentive-compensation liabilities, revenue and related accounts, and certain accounts payable and expense accruals. The auditor issued an adverse opinion on internal control, while giving an unqualified opinion on the financial statements. CRA said remediation was underway and planned further work in fiscal 2020.
- Contingent consideration related to the C1 acquisition was $11.6 million at fair value and is expected to be paid before the end of Q2 FY2021; the expected settlement amount in the contractual-obligations table was $12.0 million. Changes in its estimated fair value affect earnings.
- The company reported no material pending legal proceedings; it stated ordinary-course legal matters were not expected to materially affect financial position or results. The filing notes that estimates for variable consideration, incentive compensation, taxes and contingent consideration require judgment.
Important facts for investors to verify
- Review the planned remediation and subsequent testing of the material weaknesses in revenue, incentive compensation, and accrual controls.
- Track whether revenue growth converts into improved operating margin and cash flow, given lower utilization and higher service-cost ratio.
- Assess the cash and financing impact of the $30 million post-year-end revolver draw, ongoing repurchases and dividends, and substantial lease commitments.
- Monitor C1 contingent-consideration estimates and payment timing, as well as forgivable-loan balances and related compensation expense.
- Evaluate exposure to consultant retention, client engagement variability, fixed-price project performance, U.K./European conditions and currency changes.