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CRAI > SEC Filings for CRAI > Form 10-Q on 28-Oct-2013All Recent SEC Filings

Show all filings for CRA INTERNATIONAL, INC.

Form 10-Q for CRA INTERNATIONAL, INC.


28-Oct-2013

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.

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 the related disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the 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 2012. 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 2012 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


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Accounting for income taxes

We did not adopt any changes in the third quarter of fiscal 2013 that had a material effect on these critical accounting policies nor did we make any changes to our accounting policies in the third quarter of fiscal 2013 that changed these critical accounting policies.

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 28, 2013, Compared to the Quarter and Fiscal Year-to-Date Period Ended
September 29, 2012

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

                                                                    Fiscal Year to Date
                                 Quarter Ended                         Period Ended
                        September 28,     September 29,      September 28,      September 29,
                            2013              2012               2013                2012
Revenues                         100.0 %           100.0 %            100.0 %             100.0 %
Costs of services                 68.0              70.1               67.9                68.1

Gross profit                      32.0              29.9               32.1                31.9
Selling, general and
administrative
expenses                          21.6              26.1               23.3                25.6
Depreciation and
amortization                       2.2               2.2                2.4                 2.8

Income from
operations                         8.2               1.6                6.4                 3.5
Interest income                    0.1               0.1                0.1                 0.1
Interest expense                  (0.2 )            (0.1 )             (0.2 )              (0.1 )
Other income
(expense), net                     0.0               0.0               (0.0 )              (0.1 )

Income before
provision for income
taxes                              8.0               1.5                6.3                 3.4
Provision for income
taxes                             (3.5 )            (2.6 )             (2.6 )              (3.2 )

Net income (loss)                  4.5              (1.1 )              3.7                 0.2
Net (income) loss
attributable to
noncontrolling
interest, net of tax              (0.1 )            (0.1 )              0.1                (0.0 )

Net income (loss)
attributable to CRA
International, Inc.                4.4 %            (1.1 )%             3.8 %               0.2 %

Quarter Ended September 28, 2013 Compared to the Quarter Ended September 29, 2012

Revenues. Revenues increased by $8.5 million, or 12.9%, to $74.4 million for the third quarter of fiscal 2013 from $65.9 million for the third quarter of fiscal 2012.

Our revenue increase in the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012 was primarily due to strong performance in our litigation, regulatory and financial consulting business reflecting organic growth and increasing contributions from the new senior-level hires we welcomed to CRA during the latter part of fiscal 2012 and the first quarter of fiscal 2013. Although the revenue performance of our management consulting business was lower as compared to the third quarter of fiscal 2012, its practices experienced improved performance during the third quarter of fiscal 2013 as compared with the second quarter of fiscal 2013. Management consulting started the first half of fiscal 2013 slowly, but its practices experienced improvements in project backlog toward the end of the second quarter of fiscal 2013 that continued into the third quarter of fiscal 2013. Our utilization


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increased to 78% for the third quarter of fiscal 2013 from 67% for the third quarter of fiscal 2012. Further contributing to the increase in revenue was an increase in client reimbursable expenses, which are pass-through expenses that carry little to no margin, and the $0.2 million increase in revenue from NeuCo in the third quarter of fiscal 2013 as compared with the third quarter of fiscal 2012.

Overall, revenues outside of the U.S. represented approximately 19% of total revenues for the third quarter of fiscal 2013, compared with approximately 22% of total revenues for the third quarter of fiscal 2012. Revenues derived from fixed-price engagements decreased to 12% of total revenues for the third quarter of fiscal 2013 compared with 16% for the third quarter of fiscal 2012. The decrease in revenues from fixed-price engagements as compared to the third quarter of fiscal 2012 was due primarily to a decrease in the percentage of our revenue related to our management consulting business, as the management consulting business typically has a higher concentration of fixed-price service contracts.

Costs of Services. Costs of services increased by $4.4 million, or 9.5%, to $50.6 million for the third quarter of fiscal 2013 from $46.2 million for the third quarter of fiscal 2012. The increase in costs of services was due primarily to an increase in compensation expense for our employee consultants as a result of our increased revenues in the third quarter of fiscal 2013 as compared to the third quarter of fiscal 2012 and an increase in client reimbursable expenses of $1.6 million. These increases in costs of services were partially offset by the decrease due to there being no restructuring expenses recorded in the third quarter of fiscal 2013 as compared to $3.4 million of expenses recorded in the third quarter of fiscal 2012 associated with the restructuring actions we announced in the third quarter of fiscal 2012.

As a percentage of revenues, costs of services decreased to 68.0% for the third quarter of fiscal 2013 from 70.1% for the third quarter of fiscal 2012. The decrease in costs of services as a percentage of revenue was due primarily to the increase in revenue in the third quarter of fiscal 2013 as compared with the third quarter of fiscal 2012 and the $3.4 million of restructuring charges recorded in costs of services during the third quarter of fiscal 2012 as compared to there being no restructuring charges in the third quarter of fiscal 2013, partially offset by the increase in compensation expense and client reimbursable expenses in the third quarter of fiscal 2013 as compared to the third quarter of fiscal 2012.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $1.1 million, or 6.6%, to $16.1 million for the third quarter of fiscal 2013 from $17.2 million for the third quarter of fiscal 2012. Selling, general and administrative expenses in the third quarter of fiscal 2012 included $1.0 million of restructuring charges 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 2013. Furthermore, decreases in travel expense, professional fees, and outside consultant charges for the third quarter of fiscal 2013 as compared to the third quarter of fiscal 2012 resulted from the restructuring actions we announced in the third quarter of fiscal 2012. Additional contributors to the decrease in selling, general, and administrative expense were decreased rent and office operating expenses resulting from our reduction of leased office space in London, England at the end of the second quarter of fiscal 2012 and in Boston, Massachusetts at the end of the fourth quarter of fiscal 2012. Partially offsetting these decreases were an increase in commissions to non-employee experts of $0.6 million and an increase in compensation expense in the third quarter of fiscal 2013 as compared to the third quarter of fiscal 2012.

As a percentage of revenues, selling, general and administrative expenses decreased to 21.6% for the third quarter of fiscal 2013 from 26.1% for the third quarter of fiscal 2012, which was primarily due to the increase in revenue in the third quarter of fiscal 2013 as compared with the third quarter of fiscal 2012 and to the decrease in selling, general and administrative expenses discussed previously, partially offset by the increase in commissions to non-employee experts from 2.6% of revenues for the third quarter of fiscal 2012 to 3.2% of revenues for the third quarter of fiscal 2013.


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Depreciation and Amortization. Depreciation and amortization increased by $0.2 million, or 11.2%, to $1.6 million for the third quarter of fiscal 2013 from $1.5 million for the third quarter of fiscal 2012. The increase was primarily due to amortization of intangibles arising from the acquisition of a 40-person litigation consulting team that joined us effective February 1, 2013.

Interest Expense. Interest expense increased by $109,000 to $183,000 for the third quarter of fiscal 2013 from $74,000 for the third quarter of fiscal 2012. The increase was primarily due to interest expense related to the credit agreement we entered into on April 24, 2013 that provides us with a $125.0 million revolving credit facility. Upon entering into the credit agreement, we borrowed $15.0 million under the revolving credit facility, which we used, together with cash on hand, to repay in full all indebtedness outstanding under the previous credit agreement, whereupon such agreement was terminated. During the second quarter of fiscal 2013, we borrowed an additional $2.3 million under the multi-currency portion of the credit agreement. We repaid $12.2 million during the second quarter of fiscal 2013 and the remaining $5.1 million during the third quarter of fiscal 2013.

Provision for Income Taxes. The income tax provision was $2.6 million and the effective tax rate was 44.0% for the third quarter of fiscal 2013 compared to a tax provision of $1.7 million and an effective tax rate of 169.5% for the third quarter of fiscal 2012. The effective tax rate in each of these periods was higher than our combined federal and state statutory tax rate primarily due to losses in foreign jurisdictions that provided no tax benefit.

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 $63,000 for the third quarter of fiscal 2013 and net income of $38,000 for the third quarter of fiscal 2012.

Net Income (Loss) Attributable to CRA International, Inc. Net income (loss) attributable to CRA International, Inc. changed by $4.0 million to net income of $3.3 million for the third quarter of fiscal 2013 from net loss of $0.7 million for the third quarter of fiscal 2012. The diluted net income per share was $0.32 per share for the third quarter of fiscal 2013, compared to net loss per share of $0.07 per share for the third quarter of fiscal 2012. Diluted weighted average shares outstanding increased by approximately 108,000 shares to approximately 10,192,000 shares for the third quarter of fiscal 2013 from approximately 10,084,000 shares for the third quarter of fiscal 2012. 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 increase in weighted average shares outstanding was primarily due to 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 2012, offset in part by repurchases of common stock since the third quarter of fiscal 2012.

Fiscal Year-to-Date Period Ended September 28, 2013 Compared to the Fiscal Year-to-Date Period Ended September 29, 2012

Revenues. Revenues remained relatively flat at $202.8 million for the fiscal year-to-date period ended September 28, 2013 as compared with $202.9 million for the fiscal year-to-date period ended September 29, 2012. Our revenue decline in the first half of fiscal 2013 as compared with the first half of fiscal 2012 was primarily due to decreases in our management consulting business which started fiscal 2013 slowly. However, the management consulting business experienced improvements in project backlog toward the end of the second quarter of fiscal 2013 that continued into the third quarter of fiscal 2013. The decline in management consulting was partially offset by increases in litigation,


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regulatory, and financial consulting business in the latter part of the second quarter of fiscal 2013 that continued into the third quarter of fiscal 2013, reflecting organic growth and increasing contributions from the new senior-level hires we welcomed to CRA during the latter part of fiscal 2012 and the first quarter of fiscal 2013. Our utilization increased slightly to 70% for the fiscal year-to-date period ended September 28, 2013 from 69% for the fiscal year-to-date period ended September 29, 2012. In addition, revenues were impacted by an increase in client reimbursable expenses, which are pass-through expenses that carry little to no margin, partially offset by a decrease in revenues of $0.2 million for NeuCo in the year-to-date period ended September 28, 2013 as compared to the year-to-date period ended September 29, 2012.

Overall, revenues outside of the U.S. represented approximately 21% of total revenues for the fiscal year-to-date period ended September 28, 2013, compared with approximately 22% of total revenues for the fiscal year-to-date period ended September 29, 2012. Revenues derived from fixed-price engagements decreased to 13% of total revenues for the fiscal year-to-date period ended September 28, 2013 compared with 14% for the fiscal year-to-date period ended September 29, 2012.

Costs of Services. Costs of services decreased by $0.5 million, or 0.3%, to $137.6 million for the fiscal year-to-date period ended September 28, 2013 from $138.1 million for the fiscal year-to-date period ended September 29, 2012. The decrease in costs of services was due primarily to there being no restructuring expenses recorded in the third quarter of fiscal 2013 as compared to $3.4 million of expenses recorded in the third quarter of fiscal 2012 associated with the restructuring actions we announced in the third quarter of fiscal 2012. This decrease was partially offset by the an increase in compensation expense for our employee consultants as a result of our increased revenues in the third quarter of fiscal 2013 and an increase in client reimbursable expenses of $1.9 million for the fiscal year-to-date period ended September 28, 2013 as compared to the fiscal year-to-date period ended September 29, 2012.

As a percentage of revenues, costs of services decreased to 67.9% for the fiscal year-to-date period ended September 28, 2013 from 68.1% for the fiscal year-to-date period ended September 29, 2012 due primarily to the decrease in in costs of services due to 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 September 28, 2013, partially offset by an increase in client reimbursable expenses as a percentage of revenues.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $4.7 million, or 9.1%, to $47.3 million for the fiscal year-to-date period ended September 28, 2013 from $52.0 million for the fiscal year-to-date period ended September 29, 2012. Selling, general and administrative expenses in the fiscal year-to-date period ended September 29, 2012 included $1.7 million of restructuring charges 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 and Chicago, IL. There were no restructuring charges recorded in selling, general and administrative expenses in the fiscal year-to-date period ended September 28, 2013. Additionally contributing to this decrease were decreased rent and office operating expenses resulting from our reduction of leased office space in London, England and Boston, Massachusetts during fiscal 2012. Furthermore, decreases in outside consultant charges, travel expense, and professional fees for the fiscal year-to-date period ended September 28, 2013 as compared to fiscal year-to-date period ended September 29, 2012 resulted from the restructuring actions we announced in the third quarter of fiscal 2012. Partially offsetting these decreases was an increase in commissions to non-employee experts of $1.8 million in the fiscal year-to-date period ended September 28, 2013 as compared to the fiscal year-to-date period ended September 29, 2012.


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As a percentage of revenues, selling, general and administrative expenses decreased to 23.3% for the fiscal year-to-date period ended September 28, 2013 from 25.6% for the fiscal year-to-date period ended September 29, 2012, which was primarily due to restructuring charges recorded in the fiscal year-to-date period ended September 29, 2012 and the decreased rent and office operating expenses, outside consultant charges, travel expenses, and professional fees in the fiscal year-to-date period ended September 28, 2013 as compared with the fiscal year-to-date period ended September 29, 2012, partially offset by the increase in commissions to non-employee experts from 2.3% of revenues for the fiscal year-to-date period ended September 29, 2012 to 3.2% of revenues for the fiscal year-to-date period ended September 28, 2013.

Depreciation and Amortization. Depreciation and amortization decreased by $0.8 million, or 14.1%, to $4.8 million for the fiscal year-to-date period ended September 28, 2013 from $5.6 million for the fiscal year-to-date period ended September 29, 2012. Of this decrease, 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, as compared to there being no restructuring expenses recorded in the fiscal year-to-date period ended September 28, 2013. The decrease was partially offset by the amortization of intangibles arising from the acquisition of a 40-person litigation consulting team that joined the Company effective February 1, 2013.

Interest Expense. Interest expense increased by $0.2 million to $0.4 million for the fiscal year-to-date period ended September 28, 2013 from $0.2 million for the fiscal year-to-date period ended September 29, 2012. The increase was primarily due to interest expense related to the credit agreement we entered into on April 24, 2013 that provides us with a $125.0 million revolving credit facility. Upon entering into the credit agreement, we borrowed $15.0 million under the revolving credit facility, which we used, together with cash on hand, to repay in full all indebtedness outstanding under the previous credit agreement, whereupon such agreement was terminated. During the second quarter of fiscal 2013, we borrowed an additional $2.3 million under the multi-currency portion of the credit agreement. We repaid $12.2 million during the second quarter of fiscal 2013 and the remaining $5.1 million during the third quarter of fiscal 2013.

Provision for Income Taxes. For the fiscal year-to-date period ended September 28, 2013, our income tax provision was $5.2 million and the effective tax rate was 40.8% compared to $6.5 million and an effective tax rate of 92.8% for the fiscal year-to-date period ended September 29, 2012. The effective tax rate for the fiscal year-to-date period ended September 28, 2013 was lower than our combined federal and state statutory tax rate primarily due to the favorable settlement of a tax matter in the first quarter of fiscal 2013, partially offset by a discrete tax adjustment recorded in the second quarter of fiscal 2013 and the effect of losses in foreign jurisdictions that provided no tax benefit. The effective tax rate for the fiscal year-to-date period ended September 29, 2012 was higher than our combined federal and state statutory tax rate primarily due to losses in foreign jurisdictions that provided no tax benefit.

Net Income Attributable to CRA International, Inc. Net income attributable to CRA International, Inc. increased by $7.2 million to $7.6 million for the fiscal year-to-date period ended September 28, 2013 from $0.5 million for the fiscal year-to-date period ended September 29, 2012. The diluted net income per share was $0.75 per share for the fiscal year-to-date period ended September 28, 2013, compared to $0.05 per share for the fiscal year-to-date period ended September 29, 2012. Diluted weighted average shares outstanding decreased by approximately 184,000 shares to approximately 10,180,000 shares for the fiscal year-to-date period ended September 28, 2013 from approximately 10,364,000 shares for the fiscal year-to-date period ended September 29, 2012. The decrease in weighted average shares outstanding was primarily due to repurchases of common stock, 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 September 29, 2012.


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Liquidity and Capital Resources

Fiscal Year-to-Date Period Ended September 28, 2013

We believe that our current cash balances, cash generated from operations, and amounts available under our bank line of credit will be sufficient to meet our anticipated working capital, capital expenditures, and contingent consideration payment requirements for at least the next 12 months.

General. In the fiscal year-to-date period ended September 28, 2013, cash and cash equivalents decreased by $37.5 million. We completed the period with cash and cash equivalents of $17.9 million and working capital (defined as current assets less current liabilities) of $71.7 million. Of the total cash and cash equivalents of $17.9 million at September 28, 2013, $13.0 million was held within the U.S. The Company has sufficient sources of cash in the U.S. to fund U.S. cash requirements without the need to repatriate any funds.

As of September 28, 2013, a substantial portion of our cash accounts was concentrated at a single financial institution, which potentially exposes us to credit risks. The financial institution has a short-term credit rating of A-1 by Standard & Poor's ratings services. We have not experienced any losses related to such accounts, and we do not believe that there is significant risk of non-performance by the financial institution. Our cash on deposit at this financial institution is fully liquid, and we continually monitor the credit ratings of such institution. A change in the credit ratings of this financial institution could materially affect our liquidity and working capital.

Sources and Uses of Cash. During the fiscal year-to-date period ended September 28, 2013, net cash used by operations was $18.2 million. The primary . . .

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