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CRAI > SEC Filings for CRAI > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for CRA INTERNATIONAL, INC.

Form 10-Q for CRA INTERNATIONAL, INC.


8-Nov-2012

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Except for historical facts, the statements in this quarterly report are forward-looking statements. Forward-looking statements are merely our current predictions of future events. These statements are inherently uncertain, and actual events could differ materially from our predictions. Important factors that could cause actual events to vary from our predictions include those discussed below under the heading "Risk Factors." We assume no obligation to update our forward-looking statements to reflect new information or developments. We urge readers to review carefully the risk factors described in this quarterly report and in the other documents that we file with the Securities and Exchange Commission, or SEC. You can read these documents at www.sec.gov.

Our principal internet address is www.crai.com. Our website provides a link to a third-party website through which our annual, quarterly, and current reports, and amendments to those reports, are available free of charge. We believe these reports are made available as soon as reasonably practicable after we file them electronically with, or furnish them to, the SEC. We do not maintain, or provide any information directly to, the third-party website, and we do not check its accuracy.

Our website also includes information about our corporate governance practices. The Investor Relations page of our website provides a link to a web page where you can obtain a copy of our code of ethics applicable to our principal executive officer, principal financial officer, and principal accounting officer.

Recent Events

On July 22, 2012, our management committed to a plan to eliminate and restructure selected practice areas and reduce selling, general and administrative costs. In connection with this plan, we eliminated our Chemicals practice and closed our Middle East operations. These restructuring actions, along with the repositioning of other select underperforming practice areas resulted in the reduction of more than 60 consulting positions. Commensurate with these consulting staff reductions, we also took significant actions to lower our selling, general and administrative costs by reducing our administrative staff, eliminating excess office space capacity, better rationalizing remaining office space, and lowering administrative spending, particularly related to outside contractors and professional fees. The majority of these actions were completed during the third quarter of fiscal 2012, and we recorded a restructuring charge of $4.4 million in the third quarter of fiscal 2012 related to termination benefits, facility-related charges, asset write-downs and other probable charges. We expect that the remaining actions under this restructuring plan will be completed during fourth quarter of fiscal 2012 and we cannot yet reasonably estimate the charge we may incur in the fourth quarter of fiscal 2012 to complete these actions.

We have not finalized our employee separation and other compensation costs, office space reduction costs and other costs associated with these actions or the offsetting benefits we may have as a result of these actions. The restructuring charge that we expect to incur in connection with the restructuring is subject to a number of assumptions, and actual results may materially differ. We may also incur other material charges not currently contemplated due to events that may occur as a result of, or associated with, the restructuring plan.

Critical Accounting Policies and Significant Estimates

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S. ("U.S. GAAP"). The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, as well as related disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the


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reporting period. Estimates in these condensed consolidated financial statements include, but are not limited to, accounts receivable allowances, revenue recognition on fixed price contracts, depreciation of property and equipment, share-based compensation, valuation of acquired intangible assets, impairment of long lived assets, goodwill, accrued and deferred income taxes, valuation allowances on deferred tax assets, accrued compensation, accrued exit costs, and other accrued expenses. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if our assumptions based on past experience or our other assumptions do not turn out to be substantially accurate.

We have described our significant accounting policies in Note 1 to our consolidated financial statements included in our annual report on Form 10-K for fiscal 2011. We have reviewed our accounting policies, identifying those that we believe to be critical to the preparation and understanding of our consolidated financial statements in the list set forth below. See the disclosure under the heading "Critical Accounting Policies" in Item 7 of Part II of our annual report on Form 10-K for fiscal 2011 for a detailed description of these policies and their potential effects on our results of operations and financial condition.


Revenue recognition and accounts receivable allowances


Share-based compensation expense


Valuation of goodwill and other intangible assets


Accounting for income taxes

We did not adopt any changes in the fiscal year to date period ended September 29, 2012 that had a material effect on these critical accounting policies nor did we make any changes to our accounting policies in the fiscal year to date period ended September 29, 2012 that changed these critical accounting policies. See the section below for a discussion pertaining to our goodwill.

Goodwill

In September 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment ("ASU 2011-08"). The objective of ASU 2011-08 is to simplify how entities test goodwill for impairment. The amendments in ASU 2011-08 permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. ASU 2011-08 was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Our adoption of ASU 2011-08 in the first quarter of fiscal 2012 had no impact on our financial position, results of operations, cash flows, or disclosures.

In accordance with ASC Topic 350, "Intangibles-Goodwill and Other," goodwill is not subject to amortization, but is monitored at least annually for impairment, or more frequently, as necessary, if there are other potential indicators of impairment. For our goodwill impairment analysis, we operate under one reporting unit. We completed the annual impairment test required for fiscal 2011 and determined that there was no impairment. At the time of the annual test, the entity-wide estimated fair value exceeded the net book value by approximately 25%.

Late in the second quarter of fiscal 2012 our stock price experienced a decline. In the third quarter of 2012, our stock price improved but remained below the price levels experienced in


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fiscal 2011 and the first five months of fiscal 2012. We did not record any impairment losses related to goodwill or intangible assets during the fiscal year to date period ended September 29, 2012 as the stock price decline was not deemed to be more than temporary and there were no other events or circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount. In the fourth quarter of fiscal 2012, we will conduct our annual impairment test of goodwill. Due to the recent decline in our stock price, we may be required to record an impairment of goodwill in the fourth quarter of fiscal 2012 as a result of the test. A non-cash goodwill impairment charge would have the effect of decreasing our earnings in such period. If we are required to take a substantial impairment charge, our operating results would be materially adversely affected in such period.

Recent Accounting Standards

See Note 4 to our condensed consolidated financial statements included in this quarterly report on Form 10-Q for a discussion of recent accounting standards.

Results of Operations-For the Quarter and Fiscal Year to Date Period Ended
September 29, 2012, Compared to the Quarter and Fiscal Year to Date Period Ended
October 1, 2011

    The following table provides operating information as a percentage of
revenues for the periods indicated:

                                                                 Fiscal Year to Date
                                  Quarter Ended                     Period Ended
                          September 29,      October 1,     September 29,      October 1,
                              2012              2011            2012              2011
Revenues                           100.0 %         100.0 %           100.0 %         100.0 %
Costs of services                   70.1            65.6              68.1            66.0

Gross profit                        29.9            34.4              31.9            34.0
Selling, general and
administrative
expenses                            26.1            24.0              25.6            23.2
Depreciation and
amortization                         2.2             1.7               2.8             1.6

Income from operations               1.6             8.8               3.5             9.2
Interest income                      0.1             0.1               0.1             0.1
Interest expense                    (0.1 )          (0.2 )            (0.1 )          (0.4 )
Other income
(expense), net                       0.0            (0.3 )            (0.1 )          (0.1 )

Income before
provision for income
taxes                                1.5             8.4               3.4             8.8
Provision for income
taxes                               (2.6 )          (2.9 )            (3.2 )          (3.4 )

Net income (loss)                   (1.1 )           5.5               0.2             5.4
Net (income) loss
attributable to
noncontrolling
interest, net of tax                (0.1 )          (0.3 )            (0.0 )           0.0

Net income (loss)
attributable to CRA
International, Inc.                 (1.1 )%          5.2 %             0.2 %           5.4 %

Quarter Ended September 29, 2012 Compared to the Quarter Ended October 1, 2011

Revenues. Revenues decreased $5.1 million, or 7.2%, to $65.9 million for the third quarter of fiscal 2012 from $71.0 million for the third quarter of fiscal 2011.

Our third quarter results for fiscal 2012 were negatively impacted by select underperforming practice areas which affected our overall performance compared to the third quarter of fiscal 2011. As mentioned previously, in connection with the restructuring plan we committed to in the third quarter of fiscal 2012, we eliminated our Chemicals practice, closed our Middle East operations and repositioned


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other select underperforming practice areas, amongst other actions. Utilization decreased to 67% for the third quarter of fiscal 2012 from 73% for the third quarter of fiscal 2011, reflecting this underperformance and these restructuring actions. Overall, revenues outside of the U.S. represented approximately 22% of total revenues for the third quarter of fiscal 2012, compared with approximately 24% of total revenues for the third quarter of fiscal 2011. The decrease was due primarily to our management consulting business in the third quarter of fiscal 2012, particularly to our Chemicals practice and Middle East operations which were eliminated during the third quarter of fiscal 2012. Revenues derived from fixed-price engagements decreased to 16% of total revenues for the third quarter of fiscal 2012 compared with 20% for the third quarter of fiscal 2011. The decrease in revenues from fixed-price engagements was due primarily to the previously mentioned decrease in our management consulting business in the third quarter of fiscal 2012 as compared with the third quarter of fiscal 2011, as the management consulting business typically has a higher concentration of fixed-price service contracts. Another factor contributing to our overall revenue decline was the decrease in client reimbursable expenses. Client reimbursable expenses are pass-through expenses that carry little to no margin.

Costs of Services. Costs of services decreased by $0.4 million, or 0.9%, to $46.2 million for the third quarter of fiscal 2012 from $46.6 million for the third quarter of fiscal 2011. The decrease in costs of services was due primarily to the decreases in revenue, client reimbursable expenses, headcount, and $1.1 million of compensation related items for certain employees in the third quarter of fiscal 2012 as compared to the third quarter of fiscal 2011. Client reimbursable expenses decreased by $0.7 million primarily due to a decrease in the usage of outside consultants and travel expenses as a result of the decreased revenue. Employee consultant headcount decreased from 526 at the end of the third quarter of fiscal 2011 to 485 at the end of the third quarter of fiscal 2012. These decreases in costs of services were partially offset by $3.4 million of expenses associated with the restructuring actions we announced in the third quarter of fiscal 2012, compared with no restructuring expenses in the third quarter of fiscal 2011.

As a percentage of revenues, costs of services increased to 70.1% for the third quarter of fiscal 2012 from 65.6% for the third quarter of fiscal 2011. The increase in costs of services as a percentage of revenue was due primarily to the $3.4 million of restructuring charges recorded during the third quarter of fiscal 2012.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $0.2 million, or 1.3%, to $17.2 million for the third quarter of fiscal 2012 from $17.0 million for the third quarter of fiscal 2011. Selling, general and administrative expenses included $1.0 million of restructuring costs recorded in the third quarter of fiscal 2012 associated with the restructuring actions we announced in the third quarter of fiscal 2012 compared with no restructuring expenses in the third quarter of fiscal 2011. Additionally, commissions to nonemployee experts increased by $0.6 million in the third quarter of fiscal 2012 compared to the third quarter of fiscal 2011.These increases in selling, general, and administrative expenses were offset by decreases in several areas in line with our restructuring actions, specifically reductions in professional fees, outside consultant charges, and headcount.

As a percentage of revenues, selling, general and administrative expenses increased to 26.1% for the third quarter of fiscal 2012 from 24.0% for the third quarter of fiscal 2011, which was due primarily to the $1.0 million of restructuring charges recorded during the third quarter of fiscal 2012. Additionally, commissions to nonemployee experts increased from 1.5% of revenues for the third quarter of fiscal 2011 to 2.6% of revenues for the third quarter of fiscal 2012.

Depreciation and Amortization. Depreciation and amortization increased by $0.3 million, or 22.0%, to $1.5 million for the third quarter of fiscal 2012 from $1.2 million for the third quarter of fiscal 2011.


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The increase was primarily due to the amortization of software costs related to our implementation of an enterprise-wide financial reporting system at the start of fiscal 2012.

Other Income (Expense), Net. Other income (expense), net changed by $253,000 to income of $12,000 for the third quarter of fiscal 2012 from expense of $241,000 for the third quarter of fiscal 2011. Other income (expense), net consists primarily of foreign currency exchange transaction gains and losses. We continue to manage our foreign currency exchange exposure through frequent settling of intercompany account balances and by self-hedging movements in exchange rates between the value of the dollar and foreign currencies including the Euro and the British Pound.

Provision for Income Taxes. The income tax provision was $1.7 million and the effective tax rate was 169.5% for the third quarter of fiscal 2012 compared to a tax provision of $2.1 million and an effective tax rate of 34.6% for the third quarter of fiscal 2011. The effective tax rate in the third quarter of fiscal 2012 was higher than the statutory rate primarily due to losses in foreign locations that provided no tax benefit. The effective tax rate for the third quarter of fiscal 2011 was lower than the statutory rate due to a NeuCo net operating loss carryback realized and the favorable effect of a foreign tax credit.

Net Income Attributable to Noncontrolling Interest, Net of Tax. Our ownership interest in NeuCo constitutes control under U.S. GAAP. As a result, NeuCo's financial results are consolidated with ours and allocations of the noncontrolling interest's share of NeuCo's net income result in deductions to our net income, while allocations of the noncontrolling interest's share of NeuCo's net loss result in additions to our net income. The results of operations of NeuCo allocable to its other owners was net income of $38,000 for the third quarter of fiscal 2012 and net income of $238,000 for the third quarter of fiscal 2011.

Net Income (Loss) Attributable to CRA International, Inc. Net income (loss) attributable to CRA International, Inc. changed by $4.4 million to a net loss of $0.7 million for the third quarter of fiscal 2012 from net income of $3.7 million for the third quarter of fiscal 2011. The net loss per share was $0.07 per share for the third quarter of fiscal 2012, compared to net income per diluted share of $0.34 per share for the third quarter of fiscal 2011. Diluted weighted average shares outstanding decreased by approximately 617,000 shares to approximately 10,084,000 shares for the third quarter of fiscal 2012 from approximately 10,701,000 shares for the third quarter of fiscal 2011. Diluted weighted average shares outstanding for the third quarter of fiscal 2012 excluded 130,000 common stock equivalents because we had a net loss and inclusion of these common stock equivalents would be anti-dilutive. The decrease in weighted average shares outstanding is primarily due to repurchases of common stock since the third quarter of fiscal 2011 and lower average stock price in the third quarter of fiscal 2012 as compared to the third quarter of fiscal 2011. The decreases were offset in part by an increase as a result of shares of restricted stock that have vested or that have been issued, and stock options that have been exercised since the third quarter of fiscal 2011.

Fiscal Year to Date Period Ended September 29, 2012 Compared to the Fiscal Year to Date Period Ended October 1, 2011

Revenues. Revenues decreased by $27.4 million, or 11.9%, to $202.9 million for the fiscal year to date period ended September 29, 2012 from $230.3 million for the fiscal year to date period ended October 1, 2011. Select underperforming practice areas, including our Chemicals practice and Middle East operations, affected our overall performance. As mentioned previously, in connection with the restructuring plan we committed to in the third quarter of fiscal 2012, we eliminated our Chemicals practice, closed our Middle East operations and repositioned other select underperforming practice areas, amongst other actions. Utilization decreased to 69% for the fiscal year to date period ended September 29, 2012 from 74% for the fiscal year to date period ended October 1, 2011 reflecting this underperformance and these restructuring actions. Overall, revenues outside of the U.S. represented


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approximately 22% of total revenues for the fiscal year to date period ended September 29, 2012, compared with approximately 27% of total revenues for the fiscal year to date period ended October 1, 2011. The decrease was due primarily to our management consulting business, particularly to our Chemicals practice and Middle East operations, which were eliminated in the third quarter of fiscal 2012, and our operations in Europe where economic uncertainties impacted our performance, primarily during the earlier part of fiscal 2012. Revenues derived from fixed-price engagements decreased to 14% of total revenues for the fiscal year to date period ended September 29, 2012 compared with 23% for the fiscal year to date period ended October 1, 2011. The decrease in revenues from fixed-price engagements was due primarily to the previously mentioned decrease in our management consulting business, as the management consulting business typically has a higher concentration of fixed-price service contracts. Another factor contributing to our overall revenue decline was the decrease in client reimbursable expenses. Client reimbursable expenses are pass-through expenses that carry little to no margin.

Costs of Services. Costs of services decreased by $13.8 million, or 9.1%, to $138.1 million for the fiscal year to date period ended September 29, 2012 from $151.9 million for the fiscal year to date period ended October 1, 2011. The decrease in costs of services was due primarily to the decreases in revenue and profitability in the fiscal year to date period ended September 29, 2012 as compared to the fiscal year to date period ended October 1, 2011, and a decrease in client reimbursable expenses. As a result of the decreased revenue and profitability, we had a decrease in incentive bonus expense for our employee consultants in the fiscal year to date period ended September 29, 2012 as compared to the fiscal year to date period ended October 1, 2011. Client reimbursable expenses decreased by $5.2 million primarily due to a decrease in the usage of outside consultants and subcontractors and a decrease in travel expenses as a result of the decreased revenue. Also contributing to the decrease was a decrease in employee consultant headcount from 526 as of October 1, 2011 to 485 as of September 29, 2012 due to restructuring actions we announced in the third quarter of fiscal 2012. These decreases in costs of services were partially offset by $3.4 million of expenses in the fiscal year to date period ended September 29, 2012 associated with the restructuring actions we announced in the third quarter of fiscal 2012, compared with no restructuring expenses in fiscal year to date period ended October 1, 2011.

As a percentage of revenues, costs of services increased to 68.1% for the fiscal year to date period ended September 29, 2012 from 66.0% for the fiscal year to date period ended October 1, 2011 primarily due to the decrease in revenue in the fiscal year to date period ended September 29, 2012 compared with the fiscal year to date period ended October 1, 2011, as the decrease in revenue outpaced the decrease in costs of services, and the $3.4 million of restructuring charges recorded during the fiscal year to date period ended September 29, 2012 as compared with no restructuring charges in the fiscal year to date period ended October 1, 2011. Partially offsetting these increases in costs of services as a percentage of revenue was the decrease in client reimbursable expenses as a percentage of sales.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $1.5 million, or 2.8%, to $52.0 million for the fiscal year to date period ended September 29, 2012 from $53.5 million for the fiscal year to date period ended October 1, 2011. The decrease was due primarily to a decrease in incentive bonus expense for our employees as a result of the decrease in revenue and profitability in the fiscal year to date period ended September 29, 2012 as compared with the fiscal year to date period ended October 1, 2011, as well as a decrease in compensation expense due to a decrease in headcount in the fiscal year to date period ended September 29, 2012 as compared with the fiscal year to date period ended October 1, 2011. Our NeuCo subsidiary also had a $0.5 million decrease in selling, general and administrative expenses in the fiscal year to date period ended September 29, 2012 compared to the fiscal year to date period ended October 1, 2011. Partially offsetting these decreases was an increase in commissions to nonemployee


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experts of $1.0 million in the fiscal year to date period ended September 29, 2012 as compared to the fiscal year to date period ended October 1, 2011 and a $0.7 million increase in restructuring expenses to $1.7 million in the fiscal year to date period ended September 29, 2012 as compared to $1.0 million of restructuring expenses in the fiscal year to date period ended October 1, 2011. Restructuring expenses in the fiscal year to date period ended September 29, 2012 were associated principally with the restructuring actions we announced in the third quarter of fiscal 2012, the reduction of leased office space in our London, England office, and adjustments to our leased office space in Houston, TX. Restructuring expenses in the fiscal year to date period ended October 1, 2011 were related to leased office space in our Houston, TX office.

As a percentage of revenues, selling, general and administrative expenses increased to 25.6% for the fiscal year to date period ended September 29, 2012 from 23.2% for the fiscal year to date period ended October 1, 2011, which was primarily a result of the decrease in revenue in the fiscal year to date period ended September 29, 2012 compared with the fiscal year to date period ended October 1, 2011 and the increase in restructuring costs of $0.7 million in the fiscal year to date period ended September 29, 2012 as compared with the fiscal year to date period ended October 1, 2011 . Additionally, commissions to nonemployee experts increased from 1.5% of revenues for the fiscal year to date period ended October 1, 2011 to 2.3% of revenues for the fiscal year to date period ended September 29, 2012.

Depreciation and Amortization. Depreciation and amortization increased by $1.8 million, or 48.4%, to $5.6 million for the fiscal year to date period ended from $3.8 million for the fiscal year to date period ended October 1, 2011. Of this increase, approximately $1.1 million was related to the write-off of unamortized leaseholds and other costs associated with restructuring costs recorded in the second quarter of fiscal 2012 for the reduction of leased office space in our London, England office. The remaining increase of $0.7 million was . . .

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