CRA International, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and first half ended July 1, 2017, compared with periods ended July 2, 2016. The request metadata says 2016 Q2, but the filing itself is for 2017 Q2. CRA provides consulting services in litigation, regulatory and financial consulting, and management consulting.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $93.6 million | $82.6 million | $181.7 million | $163.5 million |
| Gross profit / margin | $28.3 million / 30.3% | $24.7 million / 29.8% | $53.9 million / 29.7% | $50.1 million / 30.6% |
| Operating income / margin | $5.8 million / 6.3% | $5.7 million / 6.9% | $10.8 million / 5.9% | $10.0 million / 6.1% |
| Net income attributable to CRA | $3.8 million | $5.2 million | $6.7 million | $7.6 million |
| Diluted EPS | $0.44 | $0.59 | $0.77 | $0.86 |
| Operating cash flow | Not stated separately | Not stated separately | $(8.5) million | $(5.1) million |
- Q2 revenue grew 13.3%; first-half revenue grew 11.1%. Management attributed growth mainly to its business consulting practice and higher consultant headcount, including 84 consultants added through the C1 acquisition. Utilization was 76% in Q2, flat year over year, and 74% for the first half versus 75%.
- Q2 gross margin improved, but first-half gross margin declined as compensation, incentive and retention costs rose. Q2 SG&A increased 20.1% to $20.3 million; first-half SG&A rose 8.0% to $39.0 million.
- CRA’s reported earnings declined year over year despite higher revenue. The prior-year comparison benefited from a $3.8 million GNU asset-sale gain, versus $0.25 million in Q2 2017. First-half diluted EPS also reflected higher costs and a higher effective tax rate (36.0% versus 33.1%).
Cash, liquidity and debt
- Cash and cash equivalents were $14.7 million at July 1, 2017, down $38.9 million from year-end 2016; working capital was $66.3 million. The filing attributes the cash decline principally to payment of prior-year performance bonuses, C1 acquisition consideration and share repurchases.
- First-half cash used in operations was $8.5 million, with cash uses including a $17.9 million decrease in accounts payable, accrued expenses and other liabilities and a $13.1 million increase in unbilled services. Investing activities used $18.6 million, including $16.2 million for C1 and $2.7 million in capital expenditures. Financing activities used $12.8 million, including $12.4 million of repurchases and $2.4 million of dividends.
- No borrowings were outstanding under the $125 million revolving credit facility; $2.8 million of letters of credit reduced availability. CRA reported covenant compliance. The facility must be repaid no later than April 24, 2018.
- Management said cash, operating cash generation and available revolver capacity should fund anticipated working capital and capital needs for at least 12 months. That assessment excludes future acquisitions or significant unanticipated changes.
Developments, outlook and risks
- CRA acquired C1 Consulting in January 2017. Preliminary purchase accounting included $8.8 million of identifiable intangible assets, $12.2 million of goodwill and $2.4 million of contingent consideration. The acquisition expanded life-sciences consulting; the purchase-price allocation remained preliminary.
- Q2 included a $0.5 million intangible-asset impairment charge. The Level 3 contingent consideration liability was $2.9 million at July 1, up from $0.5 million at year-end; remeasurement estimates depend on internal projections and changes affect earnings.
- No specific revenue or earnings guidance was provided. CRA anticipated regular quarterly dividends and said it expected to continue discretionary share repurchases; the board declared a $0.14-per-share dividend payable September 15, 2017.
- CRA disclosed that disclosure controls were not effective at quarter-end due to previously identified material weaknesses involving revenue and related reserves, compensation processes, and certain non-routine technical accounting. Management described remediation efforts, including added technical-accounting staff and a newly appointed Chief Accounting Officer, while stating the financial statements fairly present results in all material respects.
- Management cited ordinary-course legal actions but did not expect pending matters to materially affect financial position or results. New York and Chicago office lease amendments extend commitments through 2028. CRA also noted risks around hiring and retaining consultants, collections and unbilled work, acquisition funding, and access to future capital.
Important facts for investors to verify
- Whether revenue growth and utilization hold up as C1 is integrated, and whether the increased fixed-price mix and unbilled balances convert to cash.
- Progress and effectiveness of remediation for the disclosed material weaknesses in internal controls.
- Drivers of the higher receivable allowances and the $0.5 million intangible impairment, plus the assumptions behind contingent consideration valuations.
- Liquidity and refinancing plans before the revolving facility’s April 2018 maturity, given first-half operating cash outflow and continued capital returns.
- Final C1 purchase accounting and the potential impact of acquisition earnout payments on future cash flow and earnings.