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CRAI > SEC Filings for CRAI > Form 10-Q on 28-Apr-2014All Recent SEC Filings

Show all filings for CRA INTERNATIONAL, INC.

Form 10-Q for CRA INTERNATIONAL, INC.


28-Apr-2014

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.

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 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 2013. 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 2013 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


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Valuation of goodwill and other intangible assets


Accounting for income taxes

We did not adopt any changes in the first quarter of fiscal 2014 that had a material effect on these critical accounting policies nor did we make any changes to our accounting policies in the first quarter of fiscal 2014 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

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

                                                                  Quarter Ended
                                                             March 29,     March 30,
                                                               2014          2013
Revenues                                                          100.0 %       100.0 %
Costs of services                                                  68.0          66.6


Gross profit                                                       32.0          33.4
Selling, general and administrative expenses                       22.5          25.0
Depreciation and amortization                                       2.1           2.4


Income from operations                                              7.4           6.0
Interest income                                                     0.1           0.1
Interest expense                                                   (0.2 )        (0.1 )
Other expense, net                                                 (0.2 )        (0.6 )


Income before provision for income taxes                            7.1           5.3
Provision for income taxes                                         (2.7 )        (0.9 )


Net income                                                          4.3           4.5
Net loss attributable to noncontrolling interest, net of
tax                                                                 0.1           0.2


Net income attributable to CRA International, Inc.                  4.5 %         4.7 %

Quarter Ended March 29, 2014 Compared to the Quarter Ended March 30, 2013

Revenues. Revenues increased $13.1 million, or 20.8%, to $76.2 million for the first quarter of fiscal 2014 from $63.1 million for the first quarter of fiscal 2013. Our revenue increase was due primarily to the continued momentum from the latter part of fiscal 2013 into the first quarter of fiscal 2014 after a slow start in the first half of fiscal 2013. Revenue increased in our litigation, regulatory, and financial consulting business and management consulting business in the second half of fiscal 2013 and into the first quarter of fiscal 2014, reflecting organic growth and increasing contributions from the new senior-level hires we welcomed to CRA during the first quarter of fiscal 2013. Utilization increased to 78% for the first quarter of fiscal 2014 from 67% for the first quarter of fiscal 2013. Another factor contributing to our overall revenue increase was an increase in client reimbursable expenses, which are pass-through expenses that carry little to no margin, in the first quarter of fiscal 2014 as compared to the first quarter of fiscal 2013.

Overall, revenues outside of the U.S. represented approximately 25% of total revenues for the first quarter of fiscal 2014, compared with 24% of total revenues for the first quarter of fiscal 2013.


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Revenues derived from fixed-price engagements decreased to 12% of total revenues for the first quarter of fiscal 2014 compared with 13% for the first quarter of fiscal 2013. This decrease was due primarily to the decrease in 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 $9.9 million, or 23.4%, to $51.9 million for the first quarter of fiscal 2014 from $42.0 million for the first quarter of fiscal 2013. The increase in costs of services was due primarily to an increase in incentive compensation expense for our employee consultants, principally as a result of an increase in profitability. Costs of services also had an increase of $1.4 million in client reimbursable expenses for the first quarter of fiscal 2014 as compared to the first quarter of fiscal 2013. As a percentage of revenues, costs of services increased to 68.0% for the first quarter of fiscal 2014 from 66.6% for the first quarter of fiscal 2013 due primarily to the increase in incentive compensation expense for our employee consultants and client reimbursable expenses as a percentage of revenues in the first quarter of fiscal 2014 as compared with the first quarter of fiscal 2013.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $1.4 million, or 8.6%, to $17.2 million for the first quarter of fiscal 2014 from $15.8 million for the first quarter of fiscal 2013. The primary contributors to this increase were increased compensation expense, increased rent and office operating expenses and increased professional fees for the first quarter of fiscal 2014 as compared to the first quarter of fiscal 2013.

As a percentage of revenues, selling, general and administrative expenses decreased to 22.5% for the first quarter of fiscal 2014 from 25.0% for the first quarter of fiscal 2013 due primarily to the increase in revenues outpacing the increased compensation expense, rent and office operating expenses professional fees, and commissions to our nonemployee experts in the first quarter of fiscal 2014 as compared with the first quarter of fiscal 2013.

Other Expense, Net. Other expense, net decreased by $271,000 to $120,000 for the first quarter of fiscal 2014 from $391,000 for the first quarter of fiscal 2013. Other expense, net consists primarily of foreign currency exchange transaction gains and losses. The multi-currency credit facility we entered into on April 24, 2013 allows us to minimize such foreign exchange exposures. 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. For the first quarter of fiscal 2014, our provision for income taxes was $2.1 million and the effective tax rate was 38.6% compared to a provision of $0.5 million and an effective tax rate of 16.0% for the first quarter of fiscal 2013. The effective tax rate in the first quarter of fiscal 2014 was lower than our combined federal and state statutory tax rate due to the geographical mix of earnings and certain items that were treated as discrete items in the first quarter of fiscal 2014. The effective tax rate in the first quarter of fiscal 2013 was lower than our combined federal and state statutory tax rate due to the utilization of net operating loss carryforwards in the United Kingdom. The effective tax rate in the first quarter of fiscal 2013 was also impacted by a favorable tax settlement.

Net Loss 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. Our ownership interest in NeuCo is 55.89%. The result of operations of NeuCo allocable to its other owners was a net loss of $102,000 for the first quarter of fiscal 2014 and a net loss of $134,000 for the first quarter of fiscal 2013.


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Net Income Attributable to CRA International, Inc. Net income attributable to CRA International, Inc. increased by $0.4 million to $3.4 million for the first quarter of fiscal 2014 from $3.0 million for the first quarter of fiscal 2013. Diluted net income per share was $0.34 per share for the first quarter of fiscal 2014, compared to $0.29 per share for the first quarter of fiscal 2013. Diluted weighted average shares outstanding increased by approximately 24,000 shares to approximately 10,108,000 shares for the first quarter of fiscal 2014 from approximately 10,084,000 shares for the first quarter of fiscal 2013. The increase in diluted weighted average shares outstanding was primarily due to restricted shares that have vested or that have been issued and stock options that have been exercised since the first quarter of fiscal 2013, offset in part by repurchases of common stock since the first quarter of fiscal 2013.

Liquidity and Capital Resources

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

General. In the first quarter of fiscal 2014, cash and cash equivalents decreased by $18.8 million. We completed the quarter with cash and cash equivalents of $32.5 million and working capital (defined as current assets less current liabilities) of $74.5 million. Of the total cash and cash equivalents of $32.5 million at March 29, 2014, $21.9 million was held within the U.S. We have sufficient sources of cash in the U.S. to fund U.S. cash requirements without the need to repatriate any funds.

As of March 29, 2014, 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-2 by Standard & Poor's ratings services. We have not experienced any losses related to such accounts. We do not believe that there is significant risk of non-performance by the financial institution, and our cash on deposit at this financial institution is fully liquid. We continually monitor the credit ratings of such institution. A change in the credit worthiness of this financial institution could materially affect our liquidity and working capital.

Sources and Uses of Cash. During the first quarter of fiscal 2014, net cash used in operating activities was $14.5 million. The primary factor in cash used in operations was the decrease in "accounts payable, accrued expenses, and other liabilities" of $17.4 million due to the payment of the majority of our fiscal 2013 performance bonuses during the first quarter of fiscal 2014. Other uses of cash included a decrease in "unbilled services" of $5.0 million due to the increase in revenue. Sources of cash included a $2.2 million net favorable movement in "accounts receivable" and "accounts receivable allowances" due primarily to cash collections on accounts receivable balances during the first quarter of fiscal 2014. Cash provided by operations also included net income of $3.3 million, non-cash charges for depreciation and amortization expense of $1.6 million, and share-based compensation expense of $1.3 million, partially offset by decreased "deferred rent" of $0.7 million.

During the first quarter of fiscal 2014, net cash used by investing activities was $2.0 million, which included $1.5 million of net acquisition consideration payments and $0.4 million for capital expenditures.

We used $2.3 million of net cash in financing activities during the first quarter of fiscal 2014, primarily for the repurchase and retirement of our common stock of $2.1 million and the redemption of $0.1 million in vested employee restricted shares for tax withholdings.

Indebtedness

As of March 29, 2014, we are party to a credit agreement that provides us with a $125.0 million revolving credit facility and a $15 million sublimit for the issuance of letters of credit. We may use the


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proceeds of the revolving credit loans to provide working capital and for other general corporate purposes. Generally, we may repay any borrowings under the revolving credit facility at any time, but must repay all borrowings no later than April 24, 2018. There were no amounts outstanding under this revolving line of credit as of March 29, 2014.

The amount available under this revolving line of credit is reduced by certain letters of credit outstanding, which amounted to $1.4 million as of March 29, 2014.

Borrowings under the revolving credit facility bear interest at a rate per annum of either (i) the adjusted base rate, as defined in the credit agreement, plus an applicable margin, which varies between 0.50% and 1.50% depending on our total leverage ratio as determined under the credit agreement, or (ii) the adjusted eurocurrency rate, as defined in the credit agreement, plus an applicable margin, which varies between 1.50% and 2.50% depending on our total leverage ratio. We are required to pay a fee on the unused portion of the revolving credit facility at a rate per annum that varies between 0.25% and 0.375% depending on our total leverage ratio. Borrowings under the credit facility are secured by 100% of the stock of certain of our U.S. subsidiaries and 65% of the stock of certain of our foreign subsidiaries, which represent approximately $6.8 million in net assets as of December 28, 2013.

Under the credit agreement, we must comply with various financial and non-financial covenants. Compliance with these financial covenants is tested on a fiscal quarterly basis. Any indebtedness outstanding under the credit facility may become immediately due and payable upon the occurrence of stated events of default, including our failure to pay principal, interest or fees or a violation of any financial covenant. The financial covenants require us to maintain a consolidated interest expense to adjusted consolidated EBITDA ratio of more than 2.5 to 1.0 and to comply with a consolidated debt to adjusted consolidated EBITDA ratio of not more than 3.0 to 1.0. The non-financial covenant restrictions of the senior credit agreement include, but are not limited to, our ability to incur additional indebtedness, engage in acquisitions or dispositions, and enter into business combinations.

Forgivable Loans and Term Loans

In order to attract and retain highly skilled professionals, we may issue forgivable loans or term loans to employees and non-employee experts. The forgivable loans have terms that are generally between three and eight years. The principal amount of forgivable loans and accrued interest is forgiven by us over the term of the loans, so long as the employee or non-employee expert continues employment or affiliation with us and complies with certain contractual requirements. The expense associated with the forgiveness of the principal amount of the loans is recorded as compensation expense over the service period, which is consistent with the term of the loans. During the first quarter of fiscal 2014, we issued approximately $5.0 million in forgivable loans to employees and non-employee experts for future service. As of March 29, 2014, we had obligations to issue approximately $4.3 million in forgivable loans to employees, future employees and non-employee experts for future service. We expect that the $4.3 million in loans will be issued, and the corresponding payments will be made, before the end of the third quarter of fiscal 2014.

Compensation Arrangements

In connection with an acquisition completed in fiscal 2013, we agreed to pay incentive performance awards to certain non-employee experts and employees of the acquired business, if specific performance targets are met from June 2013 through May 2017. Retention of amounts paid is contingent on the individuals' continued relationships with us through May 2019. The amount of the award could fluctuate depending on future performance through May 2017. Changes in the estimated award are expensed prospectively over the remaining service period. We believe that we will have sufficient funds to satisfy any obligations related to the incentive performance awards. We expect to fund these payments, if any, from existing cash resources, cash generated from operations, or financing transactions.


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Business Acquisition

On January 31, 2013, we announced that an approximate 40-person litigation consulting team had joined us, effective February 1, 2013. Under an agreement to hire the team, we accelerated the previously announced start dates of certain key personnel from May 2013. Under the terms of the transaction, we acquired certain intangible assets, accounts receivable, and certain client projects currently underway. The fair value of the assets acquired and the liabilities assumed as part of the acquisition were finalized in the first quarter of fiscal 2014. The acquisition was not material. The acquisition was accounted for under the purchase method of accounting, and the results of operations have been included in the accompanying statements of operations from the date of acquisition.

As part of our business, we regularly evaluate opportunities to acquire other consulting firms, practices or groups or other businesses. In recent years, we have typically paid for acquisitions with cash, or a combination of cash and our common stock, and we may continue to do so in the future. To pay for an acquisition, we may use cash on hand, cash generated from our operations, borrowings under our revolving credit facility, or we may pursue other forms of financing. Our ability to secure short-term and long-term debt or equity financing in the future, including our ability to refinance our current senior loan agreement, will depend on several factors, including our future profitability, the levels of our debt and equity, restrictions under our existing line of credit with our bank, and the overall credit and equity market environments.

Share Repurchases

On August 30, 2011, we announced that our Board of Directors approved a share repurchase program of up to $7.5 million of our common stock. On February 22, 2012, August 10, 2012, and February 13, 2014, the Board of Directors authorized the repurchase of up to an additional $4.45 million, $5.0 million, and $15.0 million, respectively, of our common stock under these programs. During the first quarter of fiscal 2014, we repurchased and retired 95,600 shares of our common stock under this program at an average price per share of $22.25. Approximately $14.3 million was available for future repurchases under these programs as of March 29, 2014. We will finance these programs with available cash and cash from future operations. We may repurchase shares under these programs in open market purchases or in privately negotiated transactions in accordance with applicable insider trading and other securities laws and regulations. We expect to continue to repurchase shares under these programs.

Contractual Obligations

On February 24, 2014, we entered into a new lease with BP Hancock LLC, as landlord, for the 9th and 10th floors (a total of 57,602 square feet) of the same office building at 200 Clarendon Street, Boston, Massachusetts in which our Boston offices are currently located. The lease's base term will expire ten years from the date that we begin paying fixed rent under the lease and, subject to certain conditions, will be extendible by us for two five-year periods. The annual fixed rent for this office space (which does not include customary operating costs and expenses) will be $42 per square foot, or $2.4 million, for the first year of the lease's base term and will increase at the rate of $1.00 per square foot during the remainder of the lease's base term. The lease gives us a right of first refusal to rent certain additional office space in the office building if it becomes available. The performance of our obligations under the lease is secured by a $1 million letter of credit.

Concurrently with our entering into this new lease, we also entered into an amendment of our existing lease with BP Hancock LLC, as landlord, for the office space we currently rent in the office building described above, which currently expires on March 31, 2015. Except with respect to 25,099 square feet of office space covered by this lease, the amendment either extends the term of this lease to, or if prior to March 31, 2015 terminates this lease on, the day prior to the date that we begin


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paying fixed rent under the new lease described above. If the term of the existing lease is extended, the amendment provides that the base rent payable under this lease during the extension period will be $2.4 million per year.

We expect that the term of the new lease will commence, and the relocation of our Boston offices to the 9th and 10th floors of the office building at 200 Clarendon Street, Boston, Massachusetts will occur, sometime in the third quarter of fiscal 2015.

Factors Affecting Future Performance

Part II, Item 1A of this quarterly report sets forth risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this quarterly report. If any of these risks, or any risks not presently known to us or that we currently believe are not significant, develops into an actual event, then our business, financial condition, and results of operations could be adversely affected.

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