UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended | ||
or | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 000-24049
CRA International, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts | 04-2372210 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
200 Clarendon Street, Boston, MA | 02116-5092 | |
(Address of principal executive offices) | (Zip Code) |
(617) 425-3000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||
---|---|---|---|---|
Common Stock, no par value | CRAI | Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer ý | Non-accelerated filer o | Smaller reporting company o Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class | Outstanding at | |
---|---|---|
Common Stock, no par value per share |
i
PART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED INCOME STATEMENTS OF OPERATIONS (unaudited)
(Inin thousands, except per share data)
| Fiscal Quarter Ended | Fiscal Year-to-Date Period Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | |||||||||
Revenues | $ | 115,686 | $ | 103,871 | $ | 332,108 | $ | 308,885 | |||||
Costs of services (exclusive of depreciation and amortization) | 83,805 | 73,717 | 233,412 | 212,813 | |||||||||
Selling, general and administrative expenses | 22,449 | 22,293 | 68,929 | 67,682 | |||||||||
Depreciation and amortization | 2,527 | 2,636 | 7,696 | 7,300 | |||||||||
| | | | | | | | | | | | | |
Income from operations | 6,905 | 5,225 | 22,071 | 21,090 | |||||||||
Interest expense, net | (424 | ) | (222 | ) | (954 | ) | (560 | ) | |||||
Other income (expense), net | 210 | (64 | ) | (379 | ) | 72 | |||||||
| | | | | | | | | | | | | |
Income before provision for income taxes | 6,691 | 4,939 | 20,738 | 20,602 | |||||||||
Provision for income taxes | 952 | 1,031 | 4,754 | 4,969 | |||||||||
| | | | | | | | | | | | | |
Net income | $ | 5,739 | $ | 3,908 | $ | 15,984 | $ | 15,633 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Net income per share: | |||||||||||||
Basic | $ | 0.74 | $ | 0.48 | $ | 2.02 | $ | 1.91 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Diluted | $ | 0.71 | $ | 0.46 | $ | 1.94 | $ | 1.81 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Weighted average number of shares outstanding: | |||||||||||||
Basic | 7,769 | 8,048 | 7,903 | 8,129 | |||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Diluted | 8,050 | 8,548 | 8,205 | 8,615 | |||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
See accompanying notes to the condensed consolidated financial statements.
CRA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
(In thousands)
| Fiscal Quarter Ended | Fiscal Year-to-Date Period Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | |||||||||
Net income | $ | 5,739 | $ | 3,908 | $ | 15,984 | $ | 15,633 | |||||
Other comprehensive income | |||||||||||||
Foreign currency translation adjustments | (1,488 | ) | (198 | ) | (1,429 | ) | (1,483 | ) | |||||
| | | | | | | | | | | | | |
Comprehensive income | $ | 4,251 | $ | 3,710 | $ | 14,555 | $ | 14,150 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
See accompanying notes to the condensed consolidated financial statements.
CRA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(In thousands, except share data)
| September 28, 2019 | December 29, 2018 | |||||
---|---|---|---|---|---|---|---|
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 19,833 | $ | 38,028 | |||
Accounts receivable, net of allowances of $3,590 at September 28, 2019 and $3,764 at December 29, 2018 | 90,478 | 94,525 | |||||
Unbilled services, net of allowances of $1,474 at September 28, 2019 and $415 at December 29, 2018 | 50,274 | 36,060 | |||||
Prepaid expenses and other current assets | 11,017 | 6,423 | |||||
Forgivable loans | 8,821 | 6,104 | |||||
| | | | | | | |
Total current assets | 180,423 | 181,140 | |||||
Property and equipment, net | 57,788 | 48,088 | |||||
Goodwill | 87,813 | 88,208 | |||||
Intangible assets, net | 6,818 | 7,846 | |||||
Right-of-use assets | 110,999 | — | |||||
Deferred income taxes | 9,193 | 9,330 | |||||
Forgivable loans, net of current portion | 49,046 | 34,190 | |||||
Other assets | 3,444 | 2,044 | |||||
| | | | | | | |
Total assets | $ | 505,524 | $ | 370,846 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 23,636 | $ | 21,938 | |||
Accrued expenses | 94,557 | 108,233 | |||||
Deferred revenue and other liabilities | 4,149 | 6,866 | |||||
Current portion of lease liabilities | 10,598 | — | |||||
Current portion of deferred rent | — | 1,810 | |||||
Current portion of deferred compensation | 3,214 | 3,650 | |||||
Revolving line of credit | 36,000 | — | |||||
| | | | | | | |
Total current liabilities | 172,154 | 142,497 | |||||
Non-current liabilities: | |||||||
Deferred compensation and other non-current liabilities | 12,046 | 7,957 | |||||
Deferred rent and facility-related non-current liabilities | 1,810 | 23,618 | |||||
Non-current portion of lease liabilities | 126,869 | — | |||||
Deferred income taxes | 293 | 302 | |||||
| | | | | | | |
Total non-current liabilities | 141,018 | 31,877 | |||||
Commitments and contingencies (Note 11) | |||||||
Shareholders' equity: | |||||||
Preferred stock, no par value; 1,000,000 shares authorized; none issued and outstanding | — | — | |||||
Common stock, no par value; 25,000,000 shares authorized; 7,707,886 and 8,010,480 shares issued and outstanding at September 28, 2019 and December 29, 2018, respectively | 9,028 | 22,837 | |||||
Retained earnings | 197,347 | 186,229 | |||||
Accumulated other comprehensive loss | (14,023 | ) | (12,594 | ) | |||
| | | | | | | |
Total shareholders' equity | 192,352 | 196,472 | |||||
| | | | | | | |
Total liabilities and shareholders' equity | $ | 505,524 | $ | 370,846 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
See accompanying notes to the condensed consolidated financial statements.
CRA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
| Fiscal Year-to-Date Period Ended | ||||||
---|---|---|---|---|---|---|---|
| September 28, 2019 | September 29, 2018 | |||||
OPERATING ACTIVITIES: | |||||||
Net income | $ | 15,984 | $ | 15,633 | |||
Adjustments to reconcile net income to net cash used in operating activities: | |||||||
Depreciation and amortization | 7,696 | 7,305 | |||||
Loss on disposal of property and equipment | 5 | — | |||||
Deferred rent and facility related liabilities | 83 | 3,650 | |||||
Right-of-use asset amortization | 7,832 | — | |||||
Deferred income taxes | 117 | (102 | ) | ||||
Share-based compensation expenses | 2,641 | 3,704 | |||||
Accounts receivable allowances | (160 | ) | 233 | ||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable | 3,626 | (8,939 | ) | ||||
Unbilled services, net | (14,582 | ) | (9,976 | ) | |||
Prepaid expenses and other current assets, and other assets | (5,735 | ) | 1,417 | ||||
Forgivable loans | (18,942 | ) | (14,716 | ) | |||
Incentive cash awards | 3,628 | 2,367 | |||||
Accounts payable, accrued expenses, and other liabilities | (16,274 | ) | (8,970 | ) | |||
Lease liabilities | (5,826 | ) | — | ||||
| | | | | | | |
Net cash used in operating activities | (19,907 | ) | (8,394 | ) | |||
INVESTING ACTIVITIES: | |||||||
Purchases of property and equipment | (12,548 | ) | (13,379 | ) | |||
| | | | | | | |
Net cash used in investing activities | (12,548 | ) | (13,379 | ) | |||
FINANCING ACTIVITIES: | |||||||
Issuance of common stock, principally stock options exercises | 2,006 | 1,387 | |||||
Borrowings under revolving line of credit | 54,000 | 30,161 | |||||
Repayments under revolving line of credit | (18,000 | ) | (24,599 | ) | |||
Tax withholding payments reimbursed by shares | (388 | ) | (1,783 | ) | |||
Cash paid on dividend equivalents | (35 | ) | (98 | ) | |||
Cash dividends paid to shareholders | (4,742 | ) | (4,168 | ) | |||
Repurchases of common stock | (18,068 | ) | (20,389 | ) | |||
Distribution to noncontrolling interest | — | (41 | ) | ||||
| | | | | | | |
Net cash provided by (used in) financing activities | 14,773 | (19,530 | ) | ||||
Effect of foreign exchange rates on cash and cash equivalents | (513 | ) | (869 | ) | |||
| | | | | | | |
Net decrease in cash and cash equivalents | (18,195 | ) | (42,172 | ) | |||
Cash and cash equivalents at beginning of period | 38,028 | 54,035 | |||||
| | | | | | | |
Cash and cash equivalents at end of period | $ | 19,833 | $ | 11,863 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Noncash investing and financing activities: | |||||||
Purchases of property and equipment not yet paid for | $ | 3,461 | $ | 1,852 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Purchases of property and equipment paid by a third party | $ | 126 | $ | — | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Asset retirement obligations | $ | 427 | $ | 217 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Right-of-use assets obtained in exchange for lease obligations | $ | 37,298 | $ | — | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Right-of-use assets related to the adoption of ASC 842 | $ | 82,329 | $ | — | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Lease liabilities related to the adoption of ASC 842 | $ | 106,765 | $ | — | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Supplemental cash flow information: | |||||||
Cash paid for taxes | $ | 6,078 | $ | 3,409 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Cash paid for interest | $ | 848 | $ | 380 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Fiscal Quarter Ended | ||||||
---|---|---|---|---|---|---|---|
| March 28, 2020 | March 30, 2019 | |||||
Revenues | $ | 126,158 | $ | 105,849 | |||
Costs of services (exclusive of depreciation and amortization) | 90,997 | 73,635 | |||||
Selling, general and administrative expenses | 24,123 | 22,743 | |||||
Depreciation and amortization | 2,943 | 2,616 | |||||
| | | | | | | |
Income from operations | 8,095 | 6,855 | |||||
Interest expense, net | (362 | ) | (11 | ) | |||
Foreign currency gains (losses), net | 1,422 | (744 | ) | ||||
| | | | | | | |
Income before provision for income taxes | 9,155 | 6,100 | |||||
Provision for income taxes | 2,687 | 1,435 | |||||
| | | | | | | |
Net income | $ | 6,468 | $ | 4,665 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net income per share: | |||||||
Basic | $ | 0.83 | $ | 0.58 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Diluted | $ | 0.80 | $ | 0.56 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Weighted average number of shares outstanding: | |||||||
Basic | 7,805 | 8,015 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Diluted | 8,037 | 8,346 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
See accompanying notes to the condensed consolidated financial statements.
CRA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
(in thousands)
| Fiscal Quarter Ended | ||||||
---|---|---|---|---|---|---|---|
| March 28, 2020 | March 30, 2019 | |||||
Net income | $ | 6,468 | $ | 4,665 | |||
Other comprehensive income (loss) | |||||||
Foreign currency translation adjustments | (2,427 | ) | 712 | ||||
| | | | | | | |
Comprehensive income | $ | 4,041 | $ | 5,377 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
See accompanying notes to the condensed consolidated financial statements.
CRA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITYBALANCE SHEETS (unaudited)
FOR THE FISCAL YEAR-TO-DATE PERIOD ENDED SEPTEMBER 28, 2019 (unaudited)
(Inin thousands, except share data)
| Common Stock | | | | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Accumulated Other Comprehensive Loss | | |||||||||||||
| Shares Issued | Amount | Retained Earnings | Total Shareholders' Equity | ||||||||||||
BALANCE AT DECEMBER 29, 2018 | 8,010,480 | $ | 22,837 | $ | 186,229 | $ | (12,594 | ) | $ | 196,472 | ||||||
Net income | — | — | 4,665 | — | 4,665 | |||||||||||
Foreign currency translation adjustment | — | — | — | 712 | 712 | |||||||||||
Exercise of stock options | 64,700 | 1,526 | — | — | 1,526 | |||||||||||
Share-based compensation expense | — | 911 | — | — | 911 | |||||||||||
Restricted shares vestings | 25,484 | — | — | — | — | |||||||||||
Redemption of vested employee restricted shares for tax withholding | (8,157 | ) | (388 | ) | — | — | (388 | ) | ||||||||
Shares repurchased | (86,609 | ) | (4,349 | ) | — | — | (4,349 | ) | ||||||||
Accrued dividends on unvested shares | — | — | (8 | ) | — | (8 | ) | |||||||||
Cash paid on dividend equivalents | — | — | (35 | ) | — | (35 | ) | |||||||||
Cash dividends paid to shareholders ($0.20 per share) | — | — | (1,616 | ) | — | (1,616 | ) | |||||||||
| | | | | | | | | | | | | | | | |
BALANCE AT MARCH 30, 2019 | 8,005,898 | $ | 20,537 | $ | 189,235 | $ | (11,882 | ) | $ | 197,890 | ||||||
| | | | | | | | | | | | | | | | |
Net income | — | — | 5,580 | — | 5,580 | |||||||||||
Foreign currency translation adjustment | — | — | — | (653 | ) | (653 | ) | |||||||||
Share-based compensation expense | — | 848 | — | — | 848 | |||||||||||
Restricted shares vestings | 513 | — | — | — | — | |||||||||||
Shares repurchased | (177,101 | ) | (7,161 | ) | — | — | (7,161 | ) | ||||||||
Accrued dividends on unvested shares | — | — | (44 | ) | — | (44 | ) | |||||||||
Cash dividends paid to shareholders ($0.20 per share) | — | — | (1,580 | ) | — | (1,580 | ) | |||||||||
| | | | | | | | | | | | | | | | |
BALANCE AT JUNE 29, 2019 | 7,829,310 | $ | 14,224 | $ | 193,191 | $ | (12,535 | ) | $ | 194,880 | ||||||
| | | | | | | | | | | | | | | | |
Net income | — | — | 5,739 | — | 5,739 | |||||||||||
Foreign currency translation adjustment | — | — | — | (1,488 | ) | (1,488 | ) | |||||||||
Exercise of stock options | 21,224 | 480 | — | — | 480 | |||||||||||
Share-based compensation expense | — | 882 | — | — | 882 | |||||||||||
Restricted shares vestings | 14,754 | — | — | — | — | |||||||||||
Shares repurchased | (157,402 | ) | (6,558 | ) | — | — | (6,558 | ) | ||||||||
Accrued dividends on unvested shares | — | — | (37 | ) | — | (37 | ) | |||||||||
Cash dividends paid to shareholders ($0.20 per share) | — | — | (1,546 | ) | — | (1,546 | ) | |||||||||
| | | | | | | | | | | | | | | | |
BALANCE AT SEPTEMBER 28, 2019 | 7,707,886 | $ | 9,028 | $ | 197,347 | $ | (14,023 | ) | $ | 192,352 | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| March 28, 2020 | December 28, 2019 | |||||
---|---|---|---|---|---|---|---|
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 15,818 | $ | 25,639 | |||
Accounts receivable, net of allowances of $4,046 at March 28, 2020 and $3,838 at December 28, 2019 | 104,886 | 107,841 | |||||
Unbilled services, net of allowances of $1,422 at March 28, 2020 and $1,503 at December 28, 2019 | 44,377 | 36,569 | |||||
Prepaid expenses and other current assets | 12,181 | 7,277 | |||||
Forgivable loans | 14,177 | 6,751 | |||||
| | | | | | | |
Total current assets | 191,439 | 184,077 | |||||
Property and equipment, net | 66,626 | 61,295 | |||||
Goodwill | 87,827 | 88,504 | |||||
Intangible assets, net | 6,133 | 6,476 | |||||
Right-of-use assets | 125,688 | 130,173 | |||||
Deferred income taxes | 10,622 | 10,670 | |||||
Forgivable loans, net of current portion | 57,868 | 48,390 | |||||
Other assets | 4,005 | 3,658 | |||||
| | | | | | | |
Total assets | $ | 550,208 | $ | 533,243 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 23,668 | $ | 26,069 | |||
Accrued expenses | 77,714 | 121,301 | |||||
Deferred revenue and other liabilities | 6,509 | 6,723 | |||||
Current portion of lease liabilities | 12,432 | 12,847 | |||||
Current portion of deferred compensation | 1,000 | 4,470 | |||||
Revolving line of credit | 70,000 | — | |||||
| | | | | | | |
Total current liabilities | 191,323 | 171,410 | |||||
Non-current liabilities: | |||||||
Deferred compensation and other non-current liabilities | 15,911 | 15,071 | |||||
Facility-related non-current liabilities | 2,060 | 1,956 | |||||
Non-current portion of lease liabilities | 144,079 | 146,551 | |||||
Deferred income taxes | 475 | 504 | |||||
| | | | | | | |
Total non-current liabilities | 162,525 | 164,082 | |||||
Commitments and contingencies (Note 10) | |||||||
Shareholders' equity: | |||||||
Preferred stock, no par value; 1,000,000 shares authorized; none issued and outstanding | — | — | |||||
Common stock, no par value; 25,000,000 shares authorized; 7,756,425 and 7,814,797 shares issued and outstanding at March 28, 2020 and December 28, 2019, respectively | 5,871 | 9,265 | |||||
Retained earnings | 204,679 | 200,249 | |||||
Accumulated other comprehensive loss | (14,190 | ) | (11,763 | ) | |||
| | | | | | | |
Total shareholders' equity | 196,360 | 197,751 | |||||
| | | | | | | |
Total liabilities and shareholders' equity | $ | 550,208 | $ | 533,243 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
See accompanying notes to the condensed consolidated financial statements.
CRA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
| Fiscal Quarter Ended | ||||||
---|---|---|---|---|---|---|---|
| March 28, 2020 | March 30, 2019 | |||||
OPERATING ACTIVITIES: | |||||||
Net income | $ | 6,468 | $ | 4,665 | |||
Adjustments to reconcile net income to net cash used in operating activities: | |||||||
Depreciation and amortization | 2,943 | 2,616 | |||||
Facility-related liabilities | 35 | 35 | |||||
Right-of-use asset amortization | 2,994 | 2,209 | |||||
Deferred income taxes | 23 | 21 | |||||
Share-based compensation expenses | 655 | 911 | |||||
Accounts receivable allowances | 62 | 48 | |||||
Unrealized foreign currency remeasurement gains, net | (398 | ) | — | ||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable | 1,388 | 5,742 | |||||
Unbilled services, net | (8,217 | ) | (8,666 | ) | |||
Prepaid expenses and other current assets, and other assets | (5,327 | ) | (2,162 | ) | |||
Forgivable loans | (27,139 | ) | (16,957 | ) | |||
Incentive cash awards | 1,423 | 1,214 | |||||
Accounts payable, accrued expenses, and other liabilities | (39,121 | ) | (42,489 | ) | |||
Lease liabilities | (1,164 | ) | (3,754 | ) | |||
| | | | | | | |
Net cash used in operating activities | (65,375 | ) | (56,567 | ) | |||
INVESTING ACTIVITIES: | |||||||
Purchase of property and equipment | (7,949 | ) | (774 | ) | |||
| | | | | | | |
Net cash used in investing activities | (7,949 | ) | (774 | ) | |||
FINANCING ACTIVITIES: | |||||||
Issuance of common stock, principally stock options exercises | 151 | 1,526 | |||||
Borrowings under revolving line of credit | 70,000 | 39,000 | |||||
Tax withholding payments reimbursed by shares | (390 | ) | (388 | ) | |||
Cash paid on dividend equivalents | (40 | ) | (35 | ) | |||
Cash dividends paid to shareholders | (1,796 | ) | (1,616 | ) | |||
Repurchase of common stock | (3,810 | ) | (4,349 | ) | |||
| | | | | | | |
Net cash provided by financing activities | 64,115 | 34,138 | |||||
Effect of foreign exchange rates on cash and cash equivalents | (612 | ) | 133 | ||||
| | | | | | | |
Net decrease in cash and cash equivalents | (9,821 | ) | (23,070 | ) | |||
Cash and cash equivalents at beginning of period | 25,639 | 38,028 | |||||
| | | | | | | |
Cash and cash equivalents at end of period | $ | 15,818 | $ | 14,958 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Noncash investing and financing activities: | |||||||
Purchases of property and equipment not yet paid for | $ | 370 | $ | 1,906 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Asset retirement obligations | $ | 155 | $ | — | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Right-of-use assets obtained in exchange for lease obligations | $ | — | $ | 713 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Right-of-use assets related to the adoption of ASC 842 | $ | — | $ | 82,329 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Lease liabilities related to the adoption of ASC 842 | $ | — | $ | 106,765 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Supplemental cash flow information: | |||||||
Cash paid for taxes | $ | 695 | $ | 298 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Cash paid for interest | $ | 245 | $ | 59 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Cash paid for amounts included in operating lease liabilities | $ | 5,039 | $ | 4,627 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
See accompanying notes to the condensed consolidated financial statements.
CRA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE FISCAL QUARTER ENDED MARCH 28, 2020 (unaudited)
(in thousands, except share data)
| Common Stock | | | | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Accumulated Other Comprehensive Loss | | |||||||||||||
| Shares Issued | Amount | Retained Earnings | Total Shareholders' Equity | ||||||||||||
BALANCE AT DECEMBER 28, 2019 | 7,814,797 | $ | 9,265 | $ | 200,249 | $ | (11,763 | ) | $ | 197,751 | ||||||
| | | | | | | | | | | | | | | | |
Balance at December 29, 2019, as previously reported | 7,814,797 | $ | 9,265 | $ | 200,249 | $ | (11,763 | ) | $ | 197,751 | ||||||
Cumulative effect of a change in accounting principle related to ASC 326 | — | — | (203 | ) | — | (203 | ) | |||||||||
| | | | | | | | | | | | | | | | |
Balance at December 29, 2019, as adjusted | 7,814,797 | $ | 9,265 | $ | 200,046 | $ | (11,763 | ) | $ | 197,548 | ||||||
| | | | | | | | | | | | | | | | |
Net income | — | — | 6,468 | — | 6,468 | |||||||||||
Foreign currency translation adjustment | — | — | — | (2,427 | ) | (2,427 | ) | |||||||||
Exercise of stock options | 8,200 | 151 | — | — | 151 | |||||||||||
Share-based compensation expense | — | 655 | — | — | 655 | |||||||||||
Restricted shares vestings | 23,884 | — | — | — | — | |||||||||||
Redemption of vested employee restricted shares for tax withholding | (7,843 | ) | (390 | ) | — | — | (390 | ) | ||||||||
Shares repurchased | (82,613 | ) | (3,810 | ) | — | — | (3,810 | ) | ||||||||
Accrued dividends on unvested shares | — | — | 1 | — | 1 | |||||||||||
Cash paid on dividend equivalents | — | — | (40 | ) | — | (40 | ) | |||||||||
Cash dividends paid to shareholders | — | — | (1,796 | ) | — | (1,796 | ) | |||||||||
| | | | | | | | | | | | | | | | |
BALANCE AT MARCH 28, 2020 | 7,756,425 | $ | 5,871 | $ | 204,679 | $ | (14,190 | ) | $ | 196,360 | ||||||
| | | | | | | | | | | | | | | | |
See accompanying notes to the condensed consolidated financial statements.
CRA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE FISCAL YEAR-TO-DATE PERIODQUARTER ENDED SEPTEMBER 29, 2018MARCH 30, 2019 (unaudited)
(Inin thousands, except share data)
| Common Stock | | | | | | Common Stock | | | | ||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Accumulated Other Comprehensive Loss | CRA International, Inc. Shareholders' Equity | | | | Accumulated Other Comprehensive Loss | | ||||||||||||||||||||||||||||||
| Shares Issued | Amount | Retained Earnings | Noncontrolling Interest | Total Shareholders' Equity | Shares Issued | Amount | Retained Earnings | Total Shareholders' Equity | |||||||||||||||||||||||||||||
BALANCE AT DECEMBER 30, 2017 | 8,297,172 | $ | 47,414 | $ | 169,390 | $ | (9,896 | ) | $ | 206,908 | $ | 321 | $ | 207,229 | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||
| | | | | | | | | | | | | | | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||
Balance at December 31, 2017, as previously reported | 8,297,172 | $ | 47,414 | $ | 169,390 | $ | (9,896 | ) | 206,908 | $ | 321 | $ | 207,229 | |||||||||||||||||||||||||
Cumulative effect of a change in accounting principle related to ASC 606 | — | — | 366 | — | 366 | — | 366 | |||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||
Balance at December 31, 2017, as adjusted | 8,297,172 | $ | 47,414 | $ | 169,756 | $ | (9,896 | ) | 207,274 | $ | 321 | $ | 207,595 | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||
| | | | | | | | | | | | | | | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||
BALANCE AT DECEMBER 29, 2018 | 8,010,480 | $ | 22,837 | $ | 186,229 | $ | (12,594 | ) | $ | 196,472 | ||||||||||||||||||||||||||||
Net income | — | — | 4,886 | — | 4,886 | — | 4,886 | — | — | 4,665 | — | 4,665 | ||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | 1,318 | 1,318 | — | 1,318 | — | — | — | 712 | 712 | ||||||||||||||||||||||||||
Exercise of stock options | 24,688 | 535 | — | — | 535 | — | 535 | 64,700 | 1,526 | — | — | 1,526 | ||||||||||||||||||||||||||
Share-based compensation expense | — | 1,292 | — | — | 1,292 | — | 1,292 | — | 911 | — | — | 911 | ||||||||||||||||||||||||||
Restricted shares vestings | 97,722 | — | — | — | — | — | — | 25,484 | — | — | — | — | ||||||||||||||||||||||||||
Redemption of vested employee restricted shares for tax withholding | (35,287 | ) | (1,783 | ) | — | — | (1,783 | ) | — | (1,783 | ) | (8,157 | ) | (388 | ) | — | — | (388 | ) | |||||||||||||||||||
Shares repurchased | (162,892 | ) | (8,057 | ) | — | — | (8,057 | ) | — | (8,057 | ) | (86,609 | ) | (4,349 | ) | — | — | (4,349 | ) | |||||||||||||||||||
Accrued dividends on unvested shares | — | — | 10 | — | 10 | — | 10 | — | — | (8 | ) | — | (8 | ) | ||||||||||||||||||||||||
Cash paid on dividend equivalents | — | — | (98 | ) | — | (98 | ) | — | (98 | ) | — | — | (35 | ) | — | (35 | ) | |||||||||||||||||||||
Cash dividends paid to shareholders ($0.17 per share) | — | — | (1,423 | ) | — | (1,423 | ) | — | (1,423 | ) | ||||||||||||||||||||||||||||
Cash dividends paid to shareholders | — | — | (1,616 | ) | — | (1,616 | ) | |||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE AT MARCH 31, 2018 | 8,221,403 | $ | 39,401 | $ | 173,131 | $ | (8,578 | ) | $ | 203,954 | $ | 321 | $ | 204,275 | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||
Net income | — | — | 6,839 | — | 6,839 | — | 6,839 | |||||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | (2,603 | ) | (2,603 | ) | — | (2,603 | ) | ||||||||||||||||||||||||||||
Exercise of stock options | 19,395 | 381 | — | — | 381 | — | 381 | |||||||||||||||||||||||||||||||
Share-based compensation expense | — | 1,146 | — | — | 1,146 | — | 1,146 | |||||||||||||||||||||||||||||||
Restricted shares vestings | 513 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Shares repurchased | (215,585 | ) | (12,064 | ) | — | — | (12,064 | ) | — | (12,064 | ) | |||||||||||||||||||||||||||
Accrued dividends on unvested shares | — | — | (44 | ) | — | (44 | ) | — | (44 | ) | ||||||||||||||||||||||||||||
Cash dividends paid to shareholders ($0.17 per share) | — | — | (1,372 | ) | — | (1,372 | ) | — | (1,372 | ) | ||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||
BALANCE AT JUNE 30, 2018 | 8,025,726 | $ | 28,864 | $ | 178,554 | $ | (11,181 | ) | $ | 196,237 | $ | 321 | $ | 196,558 | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||
Net income | — | — | 3,908 | — | 3,908 | — | 3,908 | |||||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | (198 | ) | (198 | ) | — | (198 | ) | ||||||||||||||||||||||||||||
Exercise of stock options | 21,374 | 471 | — | — | 471 | — | 471 | |||||||||||||||||||||||||||||||
Share-based compensation expense | — | 1,266 | — | — | 1,266 | — | 1,266 | |||||||||||||||||||||||||||||||
Restricted shares vestings | 17,410 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Shares repurchased | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Distribution to noncontrolling interest | — | — | — | — | — | (41 | ) | (41 | ) | |||||||||||||||||||||||||||||
Accrued dividends on unvested shares | — | — | (48 | ) | — | (48 | ) | — | (48 | ) | ||||||||||||||||||||||||||||
Cash dividends paid to shareholders ($0.17 per share) | — | — | (1,373 | ) | — | (1,373 | ) | — | (1,373 | ) | ||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||
BALANCE AT SEPTEMBER 29, 2018 | 8,064,510 | $ | 30,601 | $ | 181,041 | $ | (11,379 | ) | $ | 200,263 | $ | 280 | $ | 200,543 | ||||||||||||||||||||||||
BALANCE AT MARCH 30, 2019 | 8,005,898 | $ | 20,537 | $ | 189,235 | $ | (11,882 | ) | $ | 197,890 | ||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to the condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
Description of Business
CRA International, Inc. ("CRA" or the "Company") is a worldwide leading consulting services firm that applies advanced analytic techniques and in-depth industry knowledge to complex engagements for a broad range of clients. CRA offers services in two broad areas: litigation, regulatory, and financial consulting and management consulting. CRA operates in one business segment. CRA operates its business under its registered trade name, Charles River Associates.
PrinciplesBasis of ConsolidationPresentation
The unaudited condensed consolidated financial statements include the accounts of CRA International, Inc. and its wholly owned subsidiaries. In addition, for periods prior to December 30, 2018,wholly-owned subsidiaries (collectively the consolidated financial statements include CRA's interest in GNU123 Liquidating Corporation ("GNU""Company"), formerly known as NeuCo, Inc.). All significantwhich require consolidation after the elimination of intercompany transactionsaccounts and accounts have been eliminated in consolidation.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements reflect the results of operations, financial position, cash flows, and shareholders' equity as of and for the fiscal quarters and fiscal year-to-date periods ending September 28, 2019 and September 29, 2018, respectively.transactions. These financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") for Quarterly Reports on Form 10-Q. Accordingly, these financial statements do not include all the information and note disclosures required by accounting principles generally accepted in the United States of America ("GAAP") for annual financial statements. In the opinion of management, these financial statements reflect all adjustments of a normal, recurring nature necessary for the fair statementpresentation of CRA's results of operations, financial position, cash flows, and shareholders' equity for the interim periods presented in conformity with GAAP. Results of operations for the interim periods presented herein are not necessarily indicative of results of operations for a full year. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended December 29, 201828, 2019 included in CRA's Annual Report on Form 10-K filed with the SEC on February 28, 201927, 2020 (the "2018"2019 Form 10-K").
GNU Interest
Prior to liquidation of GNU on December 18, 2018, CRA's ownership interest in GNU was 55.89%. For periods Certain prior to December 30, 2018, GNU's financial resultsyear amounts have been consolidated with CRA, and the portion of GNU's results allocablereclassified to its other owners is shown as "noncontrolling interest." GNU did not contributeconform to CRA'scurrent year presentation. These reclassifications had no effect on previously reported results of operations, during the fiscal quartersfinancial position, or fiscal year-to-date periods ended September 28, 2019 or September 29, 2018.cash flows.
Estimates
The preparation of financial statements in conformity with GAAP requires management to make significant estimates and judgments that affect the reported amounts of assets and liabilities, as well as the related disclosure of contingent assets and liabilities, at the date of the financial statements, and the
CRA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
1. Summary of Significant Accounting Policies (Continued)
reported amounts of consolidated revenues and expenses during the reporting period. Estimates in these condensed consolidated financial statements include, but are not limited to, allowances for accounts receivable and unbilled services, revenue recognition on fixed price contracts, variable consideration to be included in the transaction price of revenue contracts, depreciation of property and equipment, measurement of operating lease right-of-use ("ROU") assets and liabilities, share-based compensation, valuation of the contingent consideration liabilities,liability, valuation of acquired intangible assets, impairment of long livedlong-lived assets, and goodwill, accrued and deferred income taxes, valuation allowances on deferred tax assets, accrued incentive compensation, and certain other accrued expenses. These items are monitored and analyzed by CRA 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. CRA bases its estimates on historical experience and various other assumptions that CRA believes to be reasonable under the circumstances. Actual results may differ from those
CRA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
1. Summary of Significant Accounting Policies (Continued)
estimates if CRA's assumptions based on past experience or other assumptions do not turn out to be substantially accurate.
Common Stock and Equity
Equity transactions consist primarily of the repurchase by CRA of its common stock under its share repurchase program and the recognition of compensation expense and issuance of common stock under CRA's 2006 Equity Incentive Plan. Under CRA's share repurchase program, the Company repurchases its common stock in open market purchases (including through any Rule 10b5-1 plan adopted by CRA) or in privately negotiated transactions in accordance with applicable insider trading and other securities laws and regulations. The purchase price is first charged against available paid in capital ("PIC"), and once PIC is exhausted, any future purchases will be charged to retained earnings. CRA's common stock has no par value. All shares repurchased have been retired.
Recent Accounting Standards Adopted
Leases (Topic 842)
CRA adopted Accounting Standard Update ("ASU") No. 2016-02,Leases (Topic 842), which established Accounting Standards Codification ("ASC") Topic 842,Leases ("ASC 842") and, which supersedes ASC Topic 840,Leases ("ASC 840"), on December 30, 2018, using the additional modified retrospective transition method provided by ASC 842.method. The cumulative effect of the transition adjustments was recognized as of the date of adoption.
CRA elected the package of practical expedients provided by ASC 842, which allowed CRA to forgo reassessing the following upon adoption of the new standard: (1) whether contracts contain leases for any expired or existing contracts, (2) the lease classification for any expired or existing leases, and (3) initial direct costs for any existing or expired leases. In addition, CRA elected an accounting policy to exclude from the consolidated balance sheets the right-of-use ("ROU")ROU assets and lease liabilities related to short-term leases, which are those leases with an initial lease term of twelve months or less that do not include an option to purchase the underlying asset that CRA is reasonably certain to exercise. Refer to Note 10 for further discussion of CRA's lease accounting policy.
The reported results for 2019 reflect the application of ASC 842 guidance, whereas comparative periods and their respective disclosures prior to the adoption of ASC 842 are presented using the legacy guidance of ASC 840. As a result of adopting the new standard, CRA recognized ROU assets of $82.3 million and lease liabilities of $106.8 million.million on December 30, 2018. The difference between the amount of ROU assets and lease liabilities recognized was an adjustment to deferred rent. There was no change to net deferred tax assets as a result of CRA's adoption of ASC 842. The adoption of ASC 842 did not have a material impact on CRA's results of operations or cash flows, nor did it have an impact on any of CRA's existing debt covenants.
CRA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
1. Summary of Significant Accounting Policies (Continued)
Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
CRA adopted ASU No. 2018-07,Compensation—Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting (Topic 718) ("ASU 2018-07") on December 30, 2018. ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this update specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor's own operations by issuing share-based payment awards. The amendments also
CRA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
1. Summary of Significant Accounting Policies (Continued)
clarify that Topic 718 does not apply to share-based payments used effectively to provide financing to the issuer or awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606,Revenue from Contracts with Customers. The new guidance requires a remeasurement of nonemployee awards at fair value as of the adoption date. The adoption of ASU 2018-07 did not have a material impact on CRA's financial position, results of operations, cash flows, or disclosures.
Recent Accounting Standards Not Yet Adopted
Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
In June 2016, the Financial Accounting Standards Board ("FASB") issuedCRA adopted ASU No. 2016-13,Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"ASC 326"). ASU 2016-13 on December 29, 2019. ASC 326 replaces the methodology that recognizes impairment of financial instruments when losses have been incurred with a methodology that recognizes impairment of financial instruments when losses are expected. The amendment requires entities to use a forward-looking "expected loss" model for most financial instruments, including accounts receivable, unbilled services, and loans, whichthat is based on historical information, current information, and reasonable and supportable forecasts. For available-for-sale debt securities with unrealized losses, credit losses will be
As a result of adopting the new standard, CRA recognized as an allowance rather than asa cumulative increase to allowances for accounts receivable and unbilled services and a reduction into the amortized costfiscal 2020 opening balance of the debt securities. ASU 2016-13 is effective for CRA for interim and annual periods beginning after December 15, 2019. Early adoption is permitted for interim and annual periods beginning after December 15, 2018. Adoption of ASU 2016-13 will be applied as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period after adoption.
In November 2018, the FASB issued ASU No. 2018-19,Codification Improvements$0.2 million. Comparative periods prior to Topic 326, Financial Instruments—Credit Losses ("ASU 2018-19"). ASU 2018-19 changes the required adoption date for nonpublic business entities and clarifies that receivables arising from operating leases are not within the scope of Topic 326.
CRA is in the process of determining the effects, if any, that the adoption of the amendments mayASC 326 and their respective disclosures have not been adjusted. The adoption of ASC 326 did not have a material impact on its financial position,CRA's results of operations or cash flows or disclosures. CRA plans to adopton the amendments during the first quarterdate of 2020.transition.
Fair Value Measurements (Topic 820)
In August 2018, the FASB issuedCRA adopted ASU No. 2018-13,Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement ("ASU No. 2018-13").
CRA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
1. Summary of Significant Accounting Policies (Continued)
on December 29, 2019. The ASU eliminates, adds, and modifies certain disclosure requirements for fair value measurements from ASC 820,Fair Value Measurements and Disclosures (Topic 820).820. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurement. The adoption of the new standard is effective for interim and annual periods beginning after December 15, 2019. Entities are permitted to early adopt either the entire standard or only the provisions that eliminate or modify the requirements. CRA hasdid not yet determined the effects, if any, that the adoption of ASU 2018-13 may have a material impact on itsCRA's financial position, results of operations, cash flows, or disclosures. CRA plans to adopt ASU 2018-13 duringdisclosures on the first quarterdate of 2020.transition.
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement
In August 2018, the FASB issuedCRA adopted ASU No. 2018-15,Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"). on December 29, 2019. ASU 2018-15 clarifies the accounting for implementation costs in a cloud computing arrangement that is a service contract and aligns the requirements for capitalizing those costs with the capitalization requirements for costs incurred to develop or obtain internal-use software. CRA adopted the ASU using the prospective transition approach, as permitted under the new guidance. The adoption of the new standard did not have a material impact on CRA's financial position, results of operations, cash flows, or disclosures on the date of transition.
CRA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
1. Summary of Significant Accounting Policies (Continued)
Recent Accounting Standards Not Yet Adopted
Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU No. 2019-12,Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 simplifies or clarifies accounting for income taxes by changing the following current guidance: accounting for year-to-date losses in interim periods, accounting for tax law changes in interim periods, determining when a deferred tax liability is recognized for foreign subsidiaries that transition to or from being accounted for as equity method investments, application of income tax guidance to franchise taxes that are partially based on income, and making an intra-period allocation in situations where there is a loss in continuing operations and income or gain from other items. ASU 2019-12 also introduces new guidance to evaluate whether a step up in the tax basis of goodwill relates to a business combination or a separate transaction and provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax.
ASU 2019-12 is effective for CRA for interim and annual periods beginning after December 15, 2019.2020. Early adoption is permitted. CRA is currently evaluatingin the process of determining the effects, if any, the adoption of the ASU 2018-15 may have on its financial position, results of operations, cash flows, or disclosures. CRA plans to adopt ASU 2018-15the amendments during the first fiscal quarter of 2020.2021.
2. Fair Value of Financial Instruments
Topic 820 establishes aThe following tables show CRA's financial instruments as of March 28, 2020 and December 28, 2019 that are measured and recorded in the condensed consolidated financial statements at fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurement), then priority to quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market (Level 2 measurement), then the lowest priority to unobservable inputs (Level 3 measurement).on a recurring basis (in thousands):
| March 28, 2020 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Quoted Prices in Active Markets for Identical Assets or Liabilities | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||
| Level 1 | Level 2 | Level 3 | |||||||
Assets: | ||||||||||
Money market mutual funds | $ | 150 | $ | — | $ | — | ||||
| | | | | | | | | | |
Total Assets | $ | 150 | $ | — | $ | — | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Liabilities: | ||||||||||
Contingent consideration liability | $ | — | $ | — | $ | 12,009 | ||||
| | | | | | | | | | |
Total Liabilities | $ | — | $ | — | $ | 12,009 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
CRA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
2. Fair Value of Financial Instruments (Continued)
The following tables show CRA's financial instruments as of September 28, 2019 and December 29, 2018 that are measured and recorded in the condensed consolidated financial statements at fair value on a recurring basis (in thousands):
| September 28, 2019 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Quoted Prices in Active Markets for Identical Assets or Liabilities | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||
| Level 1 | Level 2 | Level 3 | |||||||
Assets: | ||||||||||
Money market mutual funds | $ | 149 | $ | — | $ | — | ||||
| | | | | | | | | | |
Total Assets | $ | 149 | $ | — | $ | — | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Liabilities: | ||||||||||
Contingent consideration liability | $ | — | $ | — | $ | 9,632 | ||||
| | | | | | | | | | |
Total Liabilities | $ | — | $ | — | $ | 9,632 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| December 29, 2018 | December 28, 2019 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Quoted Prices in Active Markets for Identical Assets or Liabilities | Significant Other Observable Inputs | Significant Unobservable Inputs | Quoted Prices in Active Markets for Identical Assets or Liabilities | Significant Other Observable Inputs | Significant Unobservable Inputs | ||||||||||||||
| Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||||||||||
Assets: | ||||||||||||||||||||
Money market mutual funds | $ | 18,029 | $ | — | $ | — | $ | 150 | $ | — | $ | — | ||||||||
| | | | | | | | | | | | | | | | | | | | |
Total Assets | $ | 18,029 | $ | — | $ | — | $ | 150 | $ | — | $ | — | ||||||||
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Liabilities: | ||||||||||||||||||||
Contingent consideration liability | $ | — | $ | — | $ | 6,197 | $ | — | $ | — | $ | 11,579 | ||||||||
| | | | | | | | | | | | | | | | | | | | |
Total Liabilities | $ | — | $ | — | $ | 6,197 | $ | — | $ | — | $ | 11,579 | ||||||||
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
The fair value of CRA's money market mutual fund share holdings is $1.00 per share.
The contingent consideration liabilitiesliability in the tablestable above areis for estimated future contingent consideration payments related to the acquisition of C1 Consulting, LLC, an acquisition that occurred on January 31, 2017. The asset purchase agreement provided for additional purchase consideration to be paid over a period of up to four years following the closing of the transaction in the form of an earnout, subject to the satisfaction of specific revenue performance targets.independent consulting firm, and its wholly-owned subsidiary C1 Associates (collectively, "C1"). The fair value measurement of these liabilitiesthe liability is based on significant inputs not observed in the market and thus representrepresents a Level 3 measurement. The significant unobservable inputs used in the fair value measurementsmeasurement of thesethe contingent consideration liabilitiesliability are CRA's measures of the estimated payouts based on internally generated revenue projections, expected volatility of sourcedthe revenue projections, and discount rates. The fair value of the contingent consideration liability was determined using a Monte Carlo simulation. The fair value of thesethe contingent consideration liabilitiesliability is reassessed on a quarterly basis by CRA using additional information as it becomes available, and any change in the fair value estimates are recorded in costs of services (exclusive of depreciation and amortization) on the condensed consolidated income statementstatements of that period.
Tableoperations. The contingent consideration is required to be paid prior to the end of Contents
CRA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
2. Fair Valuethe second quarter of Financial Instruments (Continued)fiscal 2021.
The following table summarizes the changes in the contingent consideration liabilitiesliability over the fiscal year-to-date periodquarter ended SeptemberMarch 28, 20192020 and the fiscal year ended December 29, 201828, 2019 (in thousands):
| September 28, 2019 | December 29, 2018 | |||||
---|---|---|---|---|---|---|---|
Beginning balance | $ | 6,197 | $ | 5,137 | |||
Remeasurement of acquisition-related contingent consideration | 1,868 | (244 | ) | ||||
Accretion | 1,567 | 1,304 | |||||
| | | | | | | |
Ending balance | $ | 9,632 | $ | 6,197 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
3. Forgivable Loans
Forgivable loan activity for the fiscal year-to-date period ended September 28, 2019 and the fiscal year ended December 29, 2018 is as follows (in thousands):
| September 28, 2019 | December 29, 2018 | |||||
---|---|---|---|---|---|---|---|
Beginning balance | $ | 40,294 | $ | 28,628 | |||
Advances | 33,404 | 30,572 | |||||
Repayments | (1,106 | ) | (3,396 | ) | |||
Reclassification from accrued expenses | (1,121 | ) | — | ||||
Amortization | (13,313 | ) | (15,329 | ) | |||
Effects of foreign currency translation | (291 | ) | (181 | ) | |||
| | | | | | | |
Ending balance | $ | 57,867 | $ | 40,294 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Current portion of forgivable loans | $ | 8,821 | $ | 6,104 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Non-current portion of forgivable loans | $ | 49,046 | $ | 34,190 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
At September 28, 2019 and December 29, 2018, CRA had other loans to current and former employees included in other assets on the condensed consolidated balance sheet amounting to $0.3 million and $0.1 million, respectively, net of allowances.
4. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill during the fiscal year-to-date period ended September 28, 2019, are as follows (in thousands):
| Goodwill, gross | Accumulated impairment losses | Goodwill, net | Fiscal Quarter Ended | Fiscal Year Ended | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at December 29, 2018 | $ | 164,625 | $ | (76,417 | ) | $ | 88,208 | ||||||||||
Effects of foreign currency translation | (395 | ) | — | (395 | ) | ||||||||||||
| March 28, 2020 | December 28, 2019 | |||||||||||||||
Beginning balance | $ | 11,579 | $ | 6,197 | |||||||||||||
Remeasurement of acquisition-related contingent consideration | 155 | 3,285 | |||||||||||||||
Accretion | 275 | 2,097 | |||||||||||||||
| | | | | | | | | | | | | | | | | |
Balance at September 28, 2019 | $ | 164,230 | $ | (76,417 | ) | $ | 87,813 | ||||||||||
Ending balance | $ | 12,009 | $ | 11,579 | |||||||||||||
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
CRA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Goodwill and Intangible Assets (Continued)
Intangible assets that are separable from goodwill and have determinable useful lives are valued separately and amortized over their expected useful lives. There were no impairment losses related to intangible assets during the fiscal year-to-date period ended September 28, 2019 or September 29, 2018.
The components of acquired identifiable intangible assets are as follows (in thousands):
| September 28, 2019 | December 29, 2018 | |||||
---|---|---|---|---|---|---|---|
Non-competition agreements, net of accumulated amortization of $190 and $544, respectively | $ | 134 | $ | 180 | |||
Customer relationships, net of accumulated amortization of $5,436 and $4,454, respectively | 6,684 | 7,666 | |||||
| | | | | | | |
Total, net of accumulated amortization of $5,626 and $4,998, respectively | $ | 6,818 | $ | 7,846 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
5. Accrued Expenses
Accrued expenses consist of the following (in thousands):
| September 28, 2019 | December 29, 2018 | |||||
---|---|---|---|---|---|---|---|
Compensation and related expenses | $ | 75,319 | $ | 90,711 | |||
Income taxes payable | 702 | 514 | |||||
Commissions due to senior consultants | 8,752 | 9,624 | |||||
Direct project accruals | 1,882 | 684 | |||||
Accrued leasehold improvements | 2,321 | 132 | |||||
Other | 5,581 | 6,568 | |||||
| | | | | | | |
Total | $ | 94,557 | $ | 108,233 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
As of September 28, 2019 and December 29, 2018, approximately $59.9 million and $73.9 million, respectively, of accrued bonuses were included above in "Compensation and related expenses."
6. Credit Agreement
CRA is party to a credit agreement that provides CRA with a $125.0 million revolving credit facility and a $15.0 million sublimit for the issuance of letters of credit. CRA may use the proceeds of the revolving credit facility to provide working capital and for other general corporate purposes. CRA may repay any borrowings under the revolving credit facility at any time, but no later than October 24, 2022. There were $36.0 million in borrowings outstanding under this revolving credit facility as of September 28, 2019. There were no outstanding borrowings under this facility as of December 29, 2018.
As of September 28, 2019, the amount available under this revolving credit facility was reduced by certain letters of credit outstanding, which amounted to $4.4 million. Under the credit agreement, CRA must comply with various financial and non-financial covenants. Compliance with these financial
CRA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. Credit Agreement (Continued)
covenants is tested on a fiscal quarterly basis. As of September 28, 2019 and December 29, 2018, CRA was in compliance with the covenants of its credit agreement.
7.3. Revenue Recognition
CRA offers functional expertise across a variety of litigation, regulatory, financial, industry and management consulting services. Together, these services comprised all of CRA's consolidated revenues during the fiscal quarters and fiscal year-to-date periods ended September 28, 2019 and September 29, 2018. The contracts that CRA enters into and operates under specify whether the engagement will beengagements are billed on a time-and-materials or a fixed-price basis. Time-and-materials contracts are typically used for litigation, regulatory, and financial consulting projects while fixed-price contracts are principally used for management consulting projects. In general, project costs are classified in costs of services and are based on the direct salary of CRA's employee consultants on the engagement plus all direct expenses incurred to complete the engagement, including any amounts billed to CRA by its non-employee experts.
Disaggregation of Revenue
The following table disaggregatestables disaggregate CRA's revenue by type of contract and geographic location (in thousands):
| Fiscal Quarter Ended | Fiscal Year-to-Date Period Ended | Fiscal Quarter Ended | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Type of Contract | September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | March 28, 2020 | March 30, 2019 | ||||||||||||||
Consulting services revenues: | ||||||||||||||||||||
Consulting services revenues | ||||||||||||||||||||
Fixed Price | $ | 30,057 | $ | 25,047 | $ | 76,622 | $ | 66,440 | $ | 28,988 | $ | 21,386 | ||||||||
Time-and-materials | 85,629 | 78,824 | 255,486 | 242,445 | 97,170 | 84,463 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Total | $ | 115,686 | $ | 103,871 | $ | 332,108 | $ | 308,885 | $ | 126,158 | $ | 105,849 | ||||||||
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Fiscal Quarter Ended | Fiscal Year-to-Date Period Ended | Fiscal Quarter Ended | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Geographic Breakdown | September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | March 28, 2020 | March 30, 2019 | ||||||||||||||
Consulting services revenues: | ||||||||||||||||||||
Consulting services revenues | ||||||||||||||||||||
United States | $ | 92,217 | $ | 80,721 | $ | 263,221 | $ | 244,878 | $ | 100,740 | $ | 83,529 | ||||||||
United Kingdom | 17,116 | 17,253 | 53,027 | 47,317 | 19,066 | 18,507 | ||||||||||||||
Other | 6,353 | 5,897 | 15,860 | 16,690 | 6,352 | 3,813 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Total | $ | 115,686 | $ | 103,871 | $ | 332,108 | $ | 308,885 | $ | 126,158 | $ | 105,849 | ||||||||
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Reserves for Variable Consideration and Credit Risk
Revenues from CRA's consulting services are recorded at the net transaction price, which includes estimates of variable consideration for which reserves are established. Variable consideration reserves are based on actual price concessions and those expected to be extended to CRA customers as well as CRA's historical realization rates and are recorded as a component of the allowances for accounts receivable and unbilled services.
CRA's accounts receivable and unbilled services consist of receivables from a broad range of clients in a variety of industries located through the U.S. and other countries. CRA performs a credit evaluation of its clients to minimize its collectability risk. Periodically, CRA will require advance payment from certain clients. However, CRA does not require collateral or other security.
CRA adopted ASC 326 on December 29, 2019, which changed the method CRA estimated reserves related to credit risk. As a result of the adoption, CRA recognized a cumulative-effect
CRA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7.3. Revenue Recognition (Continued)
recorded as a componentadjustment of the$0.2 million to retained earnings and allowances for accounts receivable and unbilled services. AdjustmentsComparative periods and their respective disclosures prior to the variable consideration reserves are as follows (in thousands):adoption of ASC 326 have not been adjusted.
| Fiscal Quarter Ended | Fiscal Year-to-Date Period Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | |||||||||
Adjustments to reserves for variable consideration and credit risk | $ | 2,282 | $ | 2,441 | $ | 6,440 | $ | 5,887 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Under ASC 326, CRA maintains allowances for accounts receivable and unbilled services for estimated losses resulting from clients' failure to make required payments. CRA estimates these allowances based on historical charge-off rates, adjusted for days of sales outstanding and expected changes to clients' financial conditions during the anticipated collection period. CRA writes off allowances when management determines the balance is uncollectible and all efforts of collection have been exhausted. Bad debt expense, net of recoveries of previously written off allowances, is reported as a component of selling, general and administrative expense. Bad debt expense isexpenses.
Prior to adopting ASC 326 in fiscal 2020, CRA determined allowances for accounts receivable and unbilled services for specific customer accounts based on the financial condition of the customer and related facts and circumstances. Expenses associated with these allowances were reported as a component of selling, general and administrative expenses.
Adjustments to the allowances for accounts receivable and unbilled services related to reserves for variable consideration are as follows (in thousands):
| Fiscal Quarter Ended | Fiscal Year-to-Date Period Ended | Fiscal Quarter Ended | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | March 28, 2020 | March 30, 2019 | ||||||||||||||
Bad debt expense | $ | 142 | $ | 748 | $ | 173 | $ | 1,150 | ||||||||||||
Additions to reserves for variable consideration | $ | 1,414 | $ | 1,443 | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Adjustments to the allowances for accounts receivable and unbilled services related to reserves for credit risk are as follows (in thousands):
| Fiscal Quarter Ended | Fiscal Year Ended | |||||
---|---|---|---|---|---|---|---|
| March 28, 2020 | December 28, 2019 | |||||
Beginning balance | $ | 370 | $ | 639 | |||
Cumulative effect of a change in accounting principle related to ASC 326 | 203 | — | |||||
Bad debt expense | 59 | 173 | |||||
Amounts written off | (138 | ) | (442 | ) | |||
| | | | | | | |
Ending balance | $ | 494 | $ | 370 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Reimbursable Expenses
Revenues also include reimbursements for costs incurred by CRA in fulfilling its performance obligations, including travel and other out-of-pocket expenses, fees for outside consultants and other reimbursable expenses. CRA recovers substantially all of these costs. The following expenses are subject to reimbursement (in thousands):
| Fiscal Quarter Ended | Fiscal Year-to-Date Period Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | |||||||||
Reimbursable expenses | $ | 13,978 | $ | 11,422 | $ | 38,991 | $ | 34,737 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
CRA collects goods and services (GST/HST) and value added taxes (VAT) from customers and records these amounts on a net basis.
Transaction Price Allocated to Future Performance Obligations
ASC 606 requires that CRA disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of September 28, 2019. The guidance provides certain practical expedients that limit this requirement for (1) contracts with an original expected length of one year or less and (2) contracts for which revenue is recognized at the amount to which CRA has the right to invoice for consulting services performed. Given the nature of its business, CRA does not disclose the value of unsatisfied performance obligations as the practical expedients apply to its unsatisfied performance obligations as of September 28, 2019.
CRA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7.3. Revenue Recognition (Continued)
reimbursable expenses. CRA recovers substantially all of these costs. The following expenses are subject to reimbursement (in thousands):
| Fiscal Quarter Ended | ||||||
---|---|---|---|---|---|---|---|
| March 28, 2020 | March 30, 2019 | |||||
Reimbursable expenses | $ | 16,430 | $ | 12,835 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Contract Balances from Contracts with Customers
CRA defines contract assets as assets for which it has recorded revenue because it determines that it is probable that it will earn a performance basedperformance-based or contingent fee, but is not yet entitled to receive a fee, because certain events, such as completion of the measurement period or client approval, must occur. These contract assets are included in accounts receivable, net and unbilled services, net within the consolidated balance sheets. The contract assets balance was immaterial as of SeptemberMarch 28, 20192020 and December 29, 2018.28, 2019.
CRA defines contract liabilities as advance payments from or billings to its clients for services that have not yet been performed or earned and retainers. These liabilities are recorded within deferred revenues and are recognized as services are provided. When consideration is received, or such consideration is unconditionally due from a customer prior to transferring consulting services to the customer under the terms of a contract, a contract liability is recorded. Contract liabilities are recognized as revenue after control of the consulting services are transferred to the customerperformance obligations have been satisfied and all revenue recognition criteria have been met.
The following table presents the opening and closing balances of CRA's contract liability (in thousands):
| Contract Liability | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Fiscal Year Ended | ||||||||||||
| Fiscal Year-to-Date Period Ended | Contract Liability | ||||||||||||
| December 29, 2018 | Fiscal Quarter Ended | Fiscal Year Ended | |||||||||||
| September 28, 2019 | March 28, 2020 | December 28, 2019 | |||||||||||
Balance at the beginning of the period | $ | 5,453 | $ | 3,287 | $ | 4,007 | $ | 5,453 | ||||||
Balance at the end of the period | $ | 2,502 | $ | 5,453 | $ | 3,495 | $ | 4,007 |
During the fiscal quarter and fiscal year-to-date period ended SeptemberMarch 28, 2019,2020, CRA recognized the following revenue as a result of changes in the contract liability balance or performance obligations satisfied in previous years (in thousands):
| Fiscal Quarter Ended | | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| Fiscal Year-to-Date Period Ended | ||||||||||
| September 28, 2019 | Fiscal Quarter Ended | |||||||||
| September 28, 2019 | March 28, 2020 | |||||||||
Amounts included in contract liabilities at the beginning of the period | $ | 2,405 | $ | 4,900 | $ | 2,906 | |||||
Performance obligations satisfied in previous periods | $ | 3,395 | $ | 3,606 | $ | 3,257 |
The timing of revenue recognition, billings and cash collections results in billed receivables, unbilled services and contract liabilities on the condensed consolidated balance sheets.
CRA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Forgivable Loans
Forgivable loan activity for the fiscal quarter ended March 28, 2020 and the fiscal year ended December 28, 2019 is as follows (in thousands):
| Fiscal Quarter Ended | Fiscal Year Ended | |||||
---|---|---|---|---|---|---|---|
| March 28, 2020 | December 28, 2019 | |||||
Beginning balance | $ | 55,141 | $ | 40,294 | |||
Advances | 33,442 | 35,166 | |||||
Repayments | — | (1,173 | ) | ||||
Reclassification from accrued expenses / to other assets | (9,713 | ) | (1,734 | ) | |||
Amortization | (6,285 | ) | (17,700 | ) | |||
Effects of foreign currency translation | (540 | ) | 288 | ||||
| | | | | | | |
Ending balance | $ | 72,045 | $ | 55,141 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Current portion of forgivable loans | $ | 14,177 | $ | 6,751 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Non-current portion of forgivable loans | $ | 57,868 | $ | 48,390 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
At March 28, 2020 and December 28, 2019, CRA had no other loans to current or former employees included in other assets on the consolidated balance sheet.
The principal amount of forgivable loans and accrued interest is forgiven by CRA over the term of the loans, provided that the employee or non-employee expert continues employment or affiliation with CRA and complies with certain contractual requirements. Under ASC 326, CRA maintains an allowance for doubtful accounts for amounts not expected to be collected, which is initially assessed when the employee or non-employee fails to comply with contractual requirements or ceases employment or affiliation with CRA. The allowances are determined per specific borrower and are based on their financial condition and related facts and circumstances, including consideration of collateral.
For the fiscal quarter ended March 28, 2020 and the fiscal year ended December 28, 2019, no allowances for or write-offs of these loans were recorded.
CRA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill during the fiscal quarter ended March 28, 2020 and the fiscal year ended December 28, 2019, are as follows (in thousands):
Balance at December 28, 2019 | ||||
Goodwill | $ | 164,921 | ||
Accumulated goodwill impairment | (76,417 | ) | ||
| | | | |
Goodwill, net at December 28, 2019 | 88,504 | |||
Foreign currency translation adjustment and other(1) | (677 | ) | ||
| | | | |
Balance at March 28, 2020 | ||||
Goodwill | 159,720 | |||
Accumulated goodwill impairment | (71,893 | ) | ||
| | | | |
Goodwill, net at March 28, 2020 | $ | 87,827 | ||
| | | | |
| | | | |
| | | | |
Intangible assets that are separable from goodwill and have determinable useful lives are valued separately and amortized over their expected useful lives. There were no impairment losses related to intangible assets during the fiscal quarter ended March 28, 2020 or during the fiscal year ended December 28, 2019.
The components of acquired identifiable intangible assets are as follows (in thousands):
| March 28, 2020 | December 28, 2019 | |||||
---|---|---|---|---|---|---|---|
Non-competition agreements | $ | 324 | $ | 324 | |||
Customer relationships | 12,120 | 12,120 | |||||
| | | | | | | |
Total cost | 12,444 | 12,444 | |||||
Accumulated amortization | (6,311 | ) | (5,968 | ) | |||
| | | | | | | |
Total intangible assets, net | $ | 6,133 | $ | 6,476 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
CRA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. Accrued Expenses
Accrued expenses consist of the following (in thousands):
| March 28, 2020 | December 28, 2019 | |||||
---|---|---|---|---|---|---|---|
Compensation and related expenses | $ | 63,462 | $ | 99,993 | |||
Income taxes payable | 1,879 | 430 | |||||
Commissions due to senior consultants | 339 | 9,961 | |||||
Other professional fees | 2,230 | 2,077 | |||||
Direct project accruals | 3,820 | 3,201 | |||||
Accrued leasehold improvements | 2,189 | 2,166 | |||||
Other | 3,795 | 3,473 | |||||
| | | | | | | |
Total | $ | 77,714 | $ | 121,301 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
As of March 28, 2020 and December 28, 2019, approximately $37.1 million and $81.2 million, respectively, of accrued bonuses for the fiscal quarter ended March 28, 2020 and the fiscal year ended December 28, 2019 were included above in "Compensation and related expenses."
7. Income Taxes
CRA's effective income tax rates were 29.4% and 23.5% for the fiscal quarters ended March 28, 2020 and March 30, 2019, respectively. The effective tax rate for the first quarter of fiscal 2020 was higher than the prior year primarily due to a decrease in the tax benefit related to the accounting for stock-based compensation, partially offset by a decrease in meals and entertainment. The effective tax rate for the first quarter of fiscal 2020 was higher than the combined federal and state statutory tax rate primarily due to non-deductible items resulting from limitations on the deductibility of compensation paid to executive officers and the deductibility of meals and entertainment. The effective tax rate for the first quarter of fiscal 2019 was lower than the combined federal and state statutory tax rate primarily due to the tax benefit related to the accounting for stock-based compensation, partially offset by non-deductible items resulting from limitations on the deductibility of compensation paid to executive officers and the deductibility of meals and entertainment.
CRA has not provided for deferred income taxes or foreign withholding taxes on undistributed earnings and other basis differences that may exist from its foreign subsidiaries as of March 28, 2020, because such earnings are considered to be indefinitely reinvested. CRA does not rely on these unremitted earnings as a source of funds for its domestic business as it expects to have sufficient cash flow in the U.S. to fund its U.S. operational and strategic needs. If CRA were to repatriate its foreign earnings that are indefinitely reinvested, it would accrue substantially no additional tax expense.
8. Net Income perPer Share
CRA calculates basic and diluted earnings per common share using the two-class method. Under the two-class method, net earnings are allocated to each class of common stock and participating security as if all of the net earnings for the period had been distributed. CRA's participating securities consist of unvested share-based payment awards that contain a nonforfeitable right to receive dividends and therefore are considered to participate in undistributed earnings with common shareholders. Basic
CRA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
8. Net Income Per Share (Continued)
earnings per common share excludes dilution and is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares outstanding for the period, as adjusted for the potential dilutive effect of non-participating share-based awards. Net earnings allocable to these participating securities were not material for the first quarter of fiscal quarters and2020 or the first quarter of fiscal year-to-date periods ended September 28, 2019 and September 29, 2018.2019.
The following table presents a reconciliation from net income to the net income available to common shareholders (in thousands):
| Fiscal Quarter Ended | Fiscal Year-to-Date Period Ended | Fiscal Quarter Ended | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | March 28, 2020 | March 30, 2019 | ||||||||||||||
Net income, as reported | $ | 5,739 | $ | 3,908 | $ | 15,984 | $ | 15,633 | $ | 6,468 | $ | 4,665 | ||||||||
Less: net income attributable to participating shares | 12 | 15 | 47 | 82 | 26 | 16 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Net income available to common shareholders | $ | 5,727 | $ | 3,893 | $ | 15,937 | $ | 15,551 | $ | 6,442 | $ | 4,649 | ||||||||
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
The following table presents a reconciliation of basic to diluted weighted average shares of common stock outstanding (in thousands):
| Fiscal Quarter Ended | Fiscal Year-to-Date Period Ended | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | March 28, 2020 | March 30, 2019 | ||||||||||||||
Basic weighted average shares outstanding | 7,769 | 8,048 | 7,903 | 8,129 | 7,805 | 8,015 | ||||||||||||||
Dilutive stock options and restricted stock units | 281 | 500 | 302 | 486 | 232 | 331 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Diluted weighted average shares outstanding | 8,050 | 8,548 | 8,205 | 8,615 | 8,037 | 8,346 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
For the fiscal quarter andended March 28, 2020, the anti-dilutive share-based awards that were excluded from the calculation of common stock equivalents for purposes of computing diluted weighted average shares outstanding amounted to 73,647 shares. For the fiscal year-to-date periodquarter ended September 28,March 30, 2019, the anti-dilutive share-based awards that were excluded from the calculation of common stock equivalents for purposes of computing diluted weighted average shares outstanding amounted to 63,164 and 47,169 shares, respectively. For the fiscal quarter and fiscal year-to-date period ended September 29, 2018, the anti-dilutive share-based awards that were excluded from the calculation of common stock equivalents for purposes of computing diluted weighted average shares outstanding amounted to 8,256 and 13,443 shares, respectively.20,078 shares. These share-based awards each period were anti-dilutive because their exercise price exceeded the average market price over the respective period.
9. Credit Agreement
CRA is party to a credit agreement that provides CRA with a $125.0 million revolving credit facility and a $15.0 million sublimit for the issuance of letters of credit. CRA may use the proceeds of the revolving credit facility to provide working capital and for other general corporate purposes. CRA may repay any borrowings under the revolving credit facility at any time, but any borrowings must be repaid no later than October 24, 2022. There were $70.0 million in borrowings outstanding under this revolving credit facility as of March 28, 2020. There were no outstanding borrowings under this facility as of December 28, 2019.
CRA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. Income TaxesCredit Agreement (Continued)
CRA's effective income tax rates were 14.2%As of March 28, 2020, the amount available under this revolving credit facility was reduced by certain letters of credit outstanding, which amounted to $4.4 million. Under the credit agreement, CRA must comply with various financial and 20.9% for the third quarter of fiscal 2019 and fiscal 2018, respectively. The effective tax rate for the third quarter of fiscal 2019 was lower than the prior year primarily due to the release of tax reserves as a result of expiration of statutes of limitation, partially offset by a decrease in the tax benefit related to share-based compensation. The effective tax rate in the third quarter of fiscal 2019 was lower than the combined federal and state statutory tax rate primarily due to the reversal of tax reserves as a result of expiration of statutes of limitation, the tax benefit on share-based compensation, and the remeasurement of U.S deferred tax assets and liabilities based on expected fiscal 2019 applicable state apportionment and statutory rates, partially offset by non-deductible items resulting from limitations on the deductibility of compensation paid to executive officers and the deductibility of meals and entertainment. The effective tax rate in the third quarter of fiscal 2018 was lower than the combined federal and state statutory tax rate primarily due to the tax benefit on share-based compensation and the remeasurement of U.S deferred tax assets and liabilities based on expected fiscal 2018 applicable state apportionment and statutory rates.
CRA's effective income tax rates were 22.9% and 24.1% for the fiscal year-to-date periods ended September 28, 2019 and September 29, 2018, respectively. The effective tax rate for the fiscal year-to-date period ended September 28, 2019 was lower than the prior year primarily due to the release of tax reserves as a result of expiration of statutes of limitation, partially offset by a decrease in the tax benefit related to share-based compensation. The effective tax rate in the fiscal year-to-date period ended September 28, 2019 was lower than the combined federal and state statutory tax rate primarily due to the release of tax reserves as a result of expiration of statutes of limitation, the tax benefit on share-based compensation, and the remeasurement of U.S deferred tax assets and liabilities based on the expected fiscal 2019 applicable state apportionment and statutory rates, partially offset by non-deductible items resulting from limitations on the deductibility of compensation paid to executive officers and the deductibility of meals and entertainment. The effective tax rate for the fiscal year-to-date period ended September 29, 2018 was lower than the combined federal and state statutory tax rate primarily due to the tax benefit on share-based compensation, partially offset by the non-deductible items referenced above.
CRA has not provided for deferred income taxes or foreign withholding taxes on undistributed earnings and other basis differences that may exist from its foreign subsidiaries as of September 28, 2019, because such earnings are considered to be indefinitely reinvested. CRA does not rely onnon-financial covenants. Compliance with these unremitted earnings as a source of funds for its domestic business as it expects to have sufficient cash flow in the U.S. to fund its U.S. operational and strategic needs. If CRA were to repatriate its foreign earnings that are indefinitely reinvested, it would accrue substantially no additional tax expense.
10. Leases
CRAfinancial covenants is a lessee under certain operating leases for office space and equipment. Prior to adopting ASC 842, CRA followed the lease accounting guidance as issued in ASC 840. Under ASC 840, CRA classified its leases as operating or capital leases based on evaluation of certain criteria of the lease agreement. For leases that contained rent escalations or rent holidays, CRA recorded the total rent expense during the lease termtested on a straight-line basis over the term of the lease and recorded the difference between the rents paid and the straight-line rent expense as deferred rent on the balance
CRA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
10. Leases (Continued)
sheet. Any tenant improvement allowances received from the lessor were recorded as a reduction to rent expense over the term of the lease.
ASC 842, which CRA adopted on December 30, 2018, requires lessees to recognize leases on the balance sheet as a lease liability with a corresponding ROU asset, subject to certain permitted accounting policy elections. As a result of adopting the new standard, CRA recognized ROU assets of $82.3 million and lease liabilities of $106.8 million related to its operating leases as of December 30, 2018. The difference between the amount of ROU assets and lease liabilities recognized was an adjustment to eliminate the deferred rent balance, which was a component of ASC 840.
Under ASC 842, CRA determines whether a contract is a lease at the inception of the contract. This determination is based on whether the contract provides CRA the right to control the use of a physically distinct asset or substantially all of the capacity of an asset. Leases with an initial noncancelable term of twelve months or less that do not include an option to purchase the underlying asset that CRA is reasonably certain to exercise are classified as short-term leases. CRA has elected as an accounting policy to exclude from the consolidated balance sheets the ROU assets and lease liabilities related to short-term leases. CRA recognizes rent expense for its operating leases on a straight-line basis over the term of the lease.
Many of CRA's equipment leases are short-term or cancellable with notice. CRA's office space leases have remaining lease terms between one and approximately twelve years, many of which include one or more options to extend the term for periods of up to five years for each option. Certain leases contain options to terminate the lease early, which may include a penalty for exercising the option. Many of the termination options require notice within a specified period, after which the option is no longer available to CRA if not exercised. The extension options and termination options may be exercised at CRA's sole discretion. CRA does not consider in the measurement of ROU assets and lease liabilities an option to extend or terminate a lease if CRA is not reasonably certain to exercise the option.fiscal quarterly basis. As of SeptemberMarch 28, 2020 and December 28, 2019, CRA has not included any options to extend or terminatewas in compliance with the covenants of its measurement of ROU assets or lease liabilities.
Certain of CRA's leases include covenants that oblige CRA, at its sole expense, to repair and maintain the leased asset periodically during the lease term. CRA is not a party to any leases that contain residual value guarantees nor is CRA a party to any leases that provide an option to purchase the underlying asset.
Many of CRA's office space leases include fixed and variable payments. Variable payments relate to real estate taxes, insurance, operating expenses, and common area maintenance, which are usually billed at actual amounts incurred proportionate to CRA's rented square feet of the building. Variable payments that do not depend on an index or rate are expensed by CRA as they are incurred and are not included in the measurement of the lease liability.
Many of CRA's leases contain both lease and non-lease components. For office space leases, the Company has elected as an accounting policy to account for lease and nonlease components as a single component. For equipment leases, fixed and variable payments are allocated to each component relative to observable or estimated standalone prices. CRA measures its variable lease costs as the portion of variable payments that are allocated to lease components.
CRA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)credit agreement.
10. Leases (Continued)
CRA measures its lease liability for each leased asset as the present value of lease payments, as defined in ASC 842, allocated to the lease component, discounted using an incremental borrowing rate specific to the underlying asset. CRA's ROU assets are equal to the lease liability, adjusted for lease incentives received, including tenant improvement allowances, and payments made to the lessor prior to the lease commencement date. CRA estimates its incremental borrowing rate for each leased asset based on the interest rate CRA would incur to borrow an amount equal to the lease payments on a collateralized basis over a similar term in a similar economic environment.
The components of CRA's lease expenses, which are included in the condensed consolidated income statement, are as follows (in thousands):
| Fiscal Quarter Ended | Fiscal Year-to-Date Period Ended | |||||
---|---|---|---|---|---|---|---|
| September 28, 2019 | September 28, 2019 | |||||
Operating lease cost | $ | 4,052 | $ | 11,276 | |||
Short-term lease cost | 106 | 295 | |||||
Variable lease cost | 1,181 | 3,150 | |||||
| | | | | | | |
Total lease cost | $ | 5,339 | $ | 14,721 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Supplemental cash flow information related to CRA's leases are as follows (in thousands):
| ||
| ||
| ||
|
The following table presents supplemental balance sheet information related to CRA's operating leases (in thousands):
| ||
| ||
| ||
| ||
| ||
| ||
| ||
|
CRA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
10. Leases (Continued)
At September 28, 2019, CRA had the following maturities of lease liabilities related to office space and equipment, all of which are under non-cancellable operating leases (in thousands):
Fiscal Year | Operating Lease Commitments | |||
---|---|---|---|---|
2019 (excluding the nine months ended September 28, 2019) | $ | 2,505 | ||
2020 | 16,883 | |||
2021 | 16,802 | |||
2022 | 16,907 | |||
2023 | 17,024 | |||
Thereafter | 96,285 | |||
| | | | |
Total lease payments | 166,406 | |||
Less: imputed interest | (28,939 | ) | ||
| | | | |
Total | $ | 137,467 | ||
| | | | |
| | | | |
| | | | |
As of September 28, 2019, CRA had additional operating leases for office space that have not yet commenced that have minimum rental commitments of $28.8 million. These operating leases will commence in fiscal year 2019 and 2020 and have lease terms of approximately six years to eleven years, subject to certain extension options.
11. Contingencies
CRA is subject to legal actions arising in the ordinary course of business. In management's opinion, based on current knowledge, CRA has adequate legal defenses and/or insurance coverage with respect to the eventuality of such actions. CRA does not believe any settlement or judgment relating to any pending legal action would materially affect its financial position or results of operations. However, the outcome of such legal actions is inherently unpredictable and subject to inherent uncertainties.
12. Correction
During While CRA has not experienced a material adverse impact to its business, financial condition or results of operations from the fourthCOVID-19 pandemic to date, there is uncertainty about client demand for the Company's services, the worldwide economy and consequently, the financial results for the current quarter may not be indicative of the results to be expected for the full fiscal 2018, CRA determined thatyear. The timing of ongoing projects and new project originations may be delayed or otherwise disrupted due to the changelength and severity of current business closures and other restrictions implemented in accounts receivable allowances presented inresponse to COVID-19, which may impact the March 31, 2018 condensed consolidated statement of cash flows required adjustment. These adjustments in disclosure are immaterialtiming and had no effect on the amount of accounts receivable presentedfuture revenues. The magnitude of any impact on CRA's business and its duration is uncertain and cannot currently be reasonably estimated at this time. CRA is not aware of any specific events or circumstances that would require an update to its estimates or adjustments to the March 31, 2018 condensed consolidated balance sheet. As a resultcarrying value of these adjustments, a classification change was required withinits assets and liabilities as of April 30, 2020, the operating activities portionissuance date of the condensed consolidated statement of cash flows. As of December 29, 2018, these adjustments were corrected and the accounts receivable and accounts receivable allowances were properly presented within the consolidated financial statements.
Table of Contentsthis Quarterly Report on Form 10-Q.
CRA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
12. Correction (Continued)
The following table presents the total classification changes required related to these adjustments for the fiscal year-to-date period ended September 29, 2018 (in thousands):
| As previously reported | As revised | |||||
---|---|---|---|---|---|---|---|
Accounts receivable allowances | $ | 884 | $ | 233 | |||
Accounts receivable | $ | (9,391 | ) | $ | (8,939 | ) | |
Unbilled services | $ | (10,175 | ) | $ | (9,976 | ) | |
Net cash used in operating activities | $ | (8,394 | ) | $ | (8,394 | ) |
13.11. Subsequent Events
On October 31, 2019,April 30, 2020, CRA announced that its Board of Directors declared a quarterly cash dividend of $0.23 per common share, payable on December 13, 2019June 12, 2020 to shareholders of record as of NovemberMay 26, 2019.
During the month of October 2019, CRA repaid $10.0 million on its existing borrowings under its revolving line of credit. After this repayment, $26.0 million of borrowings remain outstanding.2020.
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 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 business conduct and ethics applicable to our principal executive officer, principal financial officer, and principal accounting officer.
COVID-19 Assessment
While the COVID-19 pandemic did not materially adversely affect the Company's financial results and business operations in the Company's first fiscal quarter ended March 28, 2020, the COVID-19 pandemic may pose significant risks to our business. It is too early to quantify the impact, if any, this situation will have on revenue for the remainder of our fiscal year ended January 2, 2021 or beyond, but the public health actions being undertaken to reduce the spread of the virus may create significant disruptions with respect to the demand for our services and impact our ability to conduct business activities in the ordinary course for an indefinite period. Since March 16, 2020, when we implemented our stay-at-home policy and successfully transitioned to a virtual work environment, we have been closely monitoring the COVID-19 pandemic and its impacts and potential impacts on our business. However, because developments with respect to the spread of COVID-19 and its impacts have been occurring so rapidly and because of the unprecedented nature of the pandemic, we are unable to predict the extent of any adverse financial impact of COVID-19 on our business, financial condition, results of operations and cash flows. Due to the above circumstances and as described generally in this Form 10-Q, the Company's results of operations for the three-month period ended March 28, 2020 are not necessarily indicative of the results to be expected for the full fiscal year.
As of March 28, 2020, our cash and cash equivalents, were $15.9 million, and we had access to $50.6 million of borrowing capacity under our $125.0 million revolving credit facility, which when combined with our ongoing operating cash flows, will help us manage the impacts of the COVID-19 pandemic on our business and address related liquidity needs.
Please see "Item 1A. Risk Factors" in this Quarterly Report on Form 10-Q for an additional discussion of risks and potential risks of the COVID-19 pandemic on our business, financial condition and results of operations.
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 acceptedOur critical accounting principles inpolicies involving the U.S. ("U.S. GAAP"). The preparation of these financial statements requires us to makemore significant estimates and judgments that affectused in the reported amountspreparation of assets and liabilities, as well as the related disclosure of contingent assets and liabilities, at the date of theour financial statements and the reported amountsas of revenues and expenses during the reporting period. Estimates in these condensed consolidated financial statements include, but are not limited to, allowances for accounts receivable and unbilled services, revenue recognition on fixed price contracts, variable consideration to be included in the transaction price of revenue contracts, depreciation of property and equipment, measurement of operating lease right-of-use ("ROU") assets and liabilities, share-based compensation, valuation of contingent consideration liabilities, valuation of acquired intangible assets, impairment of long lived assets and goodwill, accrued and deferred income taxes, valuation allowances on deferred tax assets, accrued incentive compensation, and certain 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 differMarch 28, 2020 remain unchanged from our estimates if our assumptions based on past experience or our other assumptions do not turn out to be substantially accurate.December 28,
We have described our significant accounting policies in Note 1 to our consolidated financial statements included in the 2018 Form 10-K. 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 the 2018 Form 10-K for a detailed description of these policies and their potential effects on our results of operations and financial condition.
2019. Please refer to Part II, Item 7, "Management's Discussion and Analysis of contingent consideration liability
ExceptOperations" of our Annual Report on Form 10-K for the adoption of ASC 842 as described below, we did not adopt any changes in the fiscal year-to-date periodyear ended SeptemberDecember 28, 2019, that had a material effectfiled with the Securities and Exchange Commission on February 27, 2020, for details on these critical accounting policies, nor did we make anypolicies. Except as noted below, there have been no material changes to our accounting policies in the fiscal year-to-date period ended September 28, 2019 that changed these critical accounting policies.
Leases
We adopted ASU No. 2016-02,Leases (Topic 842) (ASC 842) on December 30, 2018, usingpolicies and significant estimates during the additional modified retrospective transition method provided by ASC 842. The reported results for 2019 reflect the application of ASC 842 guidance while the reported results for 2018 were prepared under the guidance of ASC 840,Leases (ASC 840). As a result of adopting the new standard, we recognized ROU assets of $82.3 million and lease liabilities of $106.8 million, of which $10.6 million is classified as a current liability, as of December 30, 2018. The difference between the amount of ROU assets and lease liabilities recognized was an adjustment to deferred rent. Prior periods will not be retrospectively adjusted. See Note 10 to our consolidated condensed financial statements included in this quarterly report on Form 10-Q for a complete description of our accounting policy.fiscal quarter ended March 28, 2020.
Recent Accounting Standards
See Note 1Please refer to our condensed consolidated financial statements included in this quarterly report on Form 10-Q for a discussion of recent accounting standards that we have not yet adopted under the headingsections captioned "Recent Accounting Standards Adopted" and "Recent Accounting Standards Not Yet Adopted."Adopted" included in Note 1, "Summary of Significant Accounting Policies" in Part I, Item I, "Financial Statements" of this report.
Results of Operations—For the Fiscal Quarter and Fiscal Year-to-Date Period Ended SeptemberMarch 28, 2019,2020, Compared to the Fiscal Quarter and Fiscal Year-to-Date Period Ended September 29, 2018March 30, 2019
The following table provides operating information as a percentage of revenues for the periods indicated:
| Fiscal Quarter Ended | Fiscal Year-to-Date Period Ended | Fiscal Quarter Ended | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | March 28, 2020 | March 30, 2019 | ||||||||||||||
Revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Costs of services (exclusive of depreciation and amortization) | 72.4 | 71.0 | 70.3 | 68.9 | 72.1 | 69.6 | ||||||||||||||
Selling, general and administrative expenses | 19.4 | 21.5 | 20.8 | 21.9 | 19.1 | 21.5 | ||||||||||||||
Depreciation and amortization | 2.2 | 2.5 | 2.3 | 2.4 | 2.3 | 2.5 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Income from operations | 6.0 | 5.0 | 6.6 | 6.8 | 6.4 | 6.5 | ||||||||||||||
Interest expense, net | (0.4 | ) | (0.2 | ) | (0.3 | ) | (0.2 | ) | (0.3 | ) | — | |||||||||
Other income (expense), net | 0.2 | (0.1 | ) | (0.1 | ) | 0.0 | ||||||||||||||
Foreign currency gains (losses), net | 1.1 | (0.7 | ) | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Income before provision for income taxes | 5.8 | 4.8 | 6.2 | 6.7 | 7.3 | 5.8 | ||||||||||||||
Provision for income taxes | 0.8 | 1.0 | 1.4 | 1.6 | 2.1 | 1.4 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Net income | 5.0 | % | 3.8 | % | 4.8 | % | 5.1 | % | 5.1 | % | 4.4 | % | ||||||||
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Fiscal Quarter Ended SeptemberMarch 28, 20192020, Compared to the Fiscal Quarter Ended September 29, 2018March 30, 2019
Revenues. Revenues increased by $11.8$20.4 million, or 11.4%19.2%, to $115.7$126.2 million for the thirdfirst quarter of fiscal 20192020 from $103.9$105.8 million for the thirdfirst quarter of fiscal 2018.2019. The increase in net revenue was a result of an increase in gross revenues of $10.9$19.7 million as compared to the thirdfirst quarter of fiscal 2018,2019, and a decrease in write-offs and reserves of $0.9$0.7 million compared to the thirdfirst quarter of fiscal 2018.2019. Utilization remained flat at 76%decreased to 71% for the thirdfirst quarter of fiscal 2020 from 75% for the first quarter of fiscal 2019, relative to the third quarter of fiscal 2018, while consultant headcount grew 8.2%16.3% from 685687 at the end of the thirdfirst quarter of fiscal 20182019 to 741799 at the end of the thirdfirst quarter of fiscal 2019.2020. Included in revenues are the effect of changes in currency exchange rates resulting in a decrease to revenue of $1.1$0.4 million for the fiscal quarter ended SeptemberMarch 28, 2019,2020, and a decrease of $0.2$1.5 million for the fiscal quarter ended September 29, 2018.March 30, 2019.
Overall, revenues outside of the U.S. represented approximately 20% and 22%21% of total revenues for the third quartersfirst quarter of fiscal 20192020 and fiscal 2018,2019, respectively. Revenues derived from fixed-price engagements increased to 26%23% of total revenues for the thirdfirst quarter of fiscal 20192020 compared with 24%20% of total revenues for the thirdfirst quarter of fiscal 2018.2019. These percentages of revenue derived from fixed-price engagements depend largely on the proportion of our revenues derived from our management consulting business, which typically has a higher concentration of fixed-price service contracts.
Costs of Services (exclusive of depreciation and amortization). Costs of services (exclusive of depreciation and amortization) increased by $10.1$17.4 million, or 13.7%23.6%, to $83.8$91.0 million for the thirdfirst quarter of fiscal 20192020 from $73.7$73.6 million for the thirdfirst quarter of fiscal 2018.2019. The increase in costs of services was due primarily to an increase of $2.3$4.9 million in employee compensation and fringe benefit costs attributable to our increased consultant headcount, an increase in incentive and retention compensation costs of $4.6$6.3 million, an increase in forgivable loan and incentive awards amortization of $0.3$0.9 million, and an increase in expense related to the net change in contingent consideration valuation of $0.7$0.6 million and an increase in other compensation of $1.3 million. Additionally, client reimbursable expenses increased by $3.6 million in the first quarter of fiscal 2020 compared to the first quarter of fiscal 2019. These increased expenses were partially offset by a decrease in stock compensation of $0.4$0.2 million. Additionally, client reimbursable expenses increased by $2.6 million in the third quarter of fiscal 2019 compared to the third quarter of fiscal 2018. As a percentage of revenues, costs of services (exclusive of depreciation and amortization) increased to 72.4%72.1% for the thirdfirst quarter of fiscal 20192020 from 70.9%69.6% for the thirdfirst quarter of fiscal 2018.2019.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $0.1$1.4 million, or 0.4%6.1%, to $22.4$24.1 million for the thirdfirst quarter of fiscal 20192020 from $22.3$22.7 million for the thirdfirst quarter of fiscal 2018.2019. Within this category of expenses, there was a $0.3$0.2 million increase in employee compensation and incentive compensation,fringe benefit costs and a $1.1$2.0 million increase in rent expense primarily due to additional space in our Boston office, and a $0.2 million increase in commissions to our nonemployee expertsOakland offices for the thirdfirst quarter of fiscal 20192020 as compared to the thirdfirst quarter of fiscal 2018.2019. Partially offsetting these increased expenses was a $0.4$0.3 million decrease in other operating expenses primarily due to a decrease in legal and other professional fees and a $1.0$0.5 million decrease in bad debt expense.commissions to our nonemployee experts.
As a percentage of revenues, selling, general and administrative expenses decreased to 19.4%19.1% for the thirdfirst quarter of fiscal 20192020 from 21.5% for the thirdfirst quarter of fiscal 2018.2019. Commissions to our nonemployee experts decreased to 2.6%2.2% of revenues for the thirdfirst quarter of fiscal 20192020 compared to 2.7%3.2% of revenues for the thirdfirst quarter of fiscal 2018.2019.
Provision for Income Taxes. The income tax provision was $1.0$2.7 million and the effective tax rate was 14.2%29.4% for the thirdfirst quarter of fiscal 20192020 compared to $1.0$1.4 million and 20.9%23.5% for the thirdfirst quarter of fiscal 2018.2019. The effective tax rate for the thirdfirst quarter of fiscal 20192020 was lowerhigher than the prior year primarily due to the release of tax reserves as a result of expiration of statutes of limitation, partially
offset by a decrease in the tax benefit related to share-based compensation.the accounting for stock-based compensation, partially offset by a decrease in meals and entertainment. The effective tax rate infor the thirdfirst quarter of fiscal 20192020 was lowerhigher than the combined federal and state statutory tax rate primarily due to the release of tax reserves as a result of expiration of statutes of limitation, the tax benefit on share-based compensation, and the remeasurement of U.S deferred tax assets and liabilities based on expected fiscal 2019 applicable state apportionment and statutory rates, partially offset by non-deductible items resulting from limitations on the deductibility of compensation paid to executive officers and the deductibility of meals and entertainment. The effective tax rate in the third quarter of fiscal 2018 was lower than the combined federal and state statutory tax rate primarily due to the tax benefit on share-based compensation and the remeasurement of U.S deferred tax assets and liabilities based on expected fiscal 2018 applicable state apportionment and statutory rates.
Net Income. Net income increased by $1.8 million to $5.7 million for the third quarter of fiscal 2019 from $3.9 million for the third quarter of fiscal 2018. The net income per diluted share was $0.71 per share for the third quarter of fiscal 2019, compared to $0.46 of net income per diluted share for the third quarter of fiscal 2018. Weighted average diluted shares outstanding decreased by approximately 498,000 shares to approximately 8,050,000 shares for the third quarter of fiscal 2019 from approximately 8,548,000 shares for the third quarter of fiscal 2018. The decrease in weighted average diluted shares outstanding was primarily due to the repurchase of shares of our common stock since the fiscal year-to-date period ended September 29, 2018, offset in part by the issuance or vesting of shares of restricted stock and time-vesting restricted stock units, and the exercise of stock options, since the third quarter of fiscal 2018.
Fiscal Year-to-Date Period Ended September 28, 2019 Compared to the Fiscal Year-to-Date Period Ended September 29, 2018
Revenues. Revenues increased by $23.2 million, or 7.5%, to $332.1 million for the fiscal year-to-date period ended September 28, 2019 from $308.9 million for the fiscal year-to-date period ended September 29, 2018. The increase in net revenue was a result of an increase in gross revenues of $23.8 million as compared to the fiscal year-to-date period ended September 29, 2018, offset by an increase in write-offs and reserves of $0.6 million as compared to the fiscal year-to-date period ended September 29, 2018. Utilization remained flat at 76% for the fiscal year-to-date period ended September 28, 2019 relative to the fiscal year-to-date period ended September 29, 2018, while consultant headcount increased during the period. Included in revenues are the effect of changes in currency exchange rates resulting in a decrease in revenue of $3.8 million for the fiscal year-to-date period ended September 28, 2019 and an increase in revenue of $3.3 million for the fiscal year-to-date period ended September 29, 2018, respectively.
Overall, revenues outside of the U.S. represented approximately 21% of total revenues for each of the fiscal year-to-date periods ended September 28, 2019 and September 29, 2018. Revenues derived from fixed-price engagements were 23% and 22% of total revenues for the fiscal year-to-date periods ended September 28, 2019 and September 29, 2018, respectively. These percentages of revenue derived from fixed-price engagements depend largely on the proportion of our revenues derived from our management consulting business, which typically has a higher concentration of fixed-price service contracts.
Costs of Services (exclusive of depreciation and amortization). Costs of services (exclusive of depreciation and amortization) increased by $20.6 million, or 9.7%, to $233.4 million for the fiscal year-to-date period ended September 28, 2019 from $212.8 million for the fiscal year-to-date period ended September 29, 2018. The increase in costs of services was due primarily to an increase of $5.2 million in employee compensation and fringe benefit costs associated with our increased consulting headcount, an increase in incentive and retention compensation costs of $7.7 million, an increase in forgivable loan and incentive awards amortization of $1.7 million, and an increase in the valuation of the contingent consideration of $3.4 million, partially offset by a decrease in stock compensation
expense of $1.1 million. Additionally, client reimbursable expenses increased by $4.3 million in the fiscal year-to-date period ended September 28, 2019 compared to the fiscal year-to-date period ended September 29, 2018. As a percentage of revenues, costs of services (exclusive of depreciation and amortization) increased to 70.3% for the fiscal year-to-date period ended September 28, 2019 from 68.9% for the fiscal year-to-date period ended September 29, 2018.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $1.2 million, or 1.8%, to $68.9 million for the fiscal year-to-date period ended September 28, 2019 from $67.7 million for the fiscal year-to-date period ended September 29, 2018. The primary contributor to this increase was an increase in employee and incentive compensation of $1.3 million, a $0.7 million increase in travel and entertainment, a $0.5 million increase in training and marketing, a $0.6 million increase in subscriptions and licenses, a $1.0 million increase in rent, and a $0.2 million increase in commissions to our nonemployee experts for the fiscal year-to-date period ended September 30, 2019 as compared to the fiscal year-to-date period ended September 29, 2018, offset by a $2.0 million decrease in legal and other professional fees, a $1.0 million decrease in bad debt expense, and a $0.2 million decrease in other operating expenses.
As a percentage of revenues, selling, general and administrative expenses decreased to 20.8% for the fiscal year-to-date period ended September 28, 2019 from 21.9% for the fiscal year-to-date period ended September 29, 2018 due primarily to the increase in revenues. Commissions to our nonemployee experts decreased to 2.9% of revenues for the fiscal year-to-date period ended September 28, 2019 compared to 3.0% of revenues for the fiscal year-to-date period ended September 29, 2018 as less revenue was sourced by nonemployee experts in the fiscal year-to-date period ended September 28, 2019 compared to the fiscal year-to-date period ended September 29, 2018.
Provision for Income Taxes. For fiscal year-to-date period ended September 28, 2019, our income tax provision was $4.8 million, and the effective tax rate was 22.9%, compared to a provision of $5.0 million and an effective tax rate of 24.1% for the fiscal year-to-date period ended September 29, 2018. The effective tax rate for the fiscal year-to-date period ended September 28, 2019 was lower than the prior year primarily due to the release of tax reserves as a result of expiration of statutes of limitation, partially offset by a decrease in the tax benefit related to share-based compensation. The effective tax rate in the fiscal year-to-date period ended September 28, 2019 was lower than the combined federal and state statutory tax rate primarily due to the release of tax reserves as a result of expiration of statutes of limitation, the tax benefit on share-based compensation, and the remeasurement of U.S deferred tax assets and liabilities based on the expected fiscal 2019 applicable state apportionment and statutory rates, partially offset by non-deductible items resulting from limitations on the deductibility of compensation paid to executive officers and the deductibility of meals and entertainment. The effective tax rate for the first quarter of fiscal year-to-date period ended September 29, 20182019 was lower than the combined federal and state statutory tax rate primarily due to the tax benefit on share-basedrelated to the accounting for stock-based compensation, partially offset by non-deductible items referenced above.resulting from limitations on the deductibility of compensation paid to executive officers and the deductibility of meals and entertainment.
Net Income. Net income increased by $0.4$1.8 million to $16.0$6.5 million for the first quarter of fiscal year-to-date period ended September 28, 20192020 from $15.6$4.7 million for the first quarter of fiscal year-to-date period ended September 29, 2018.2019. The diluted net income per diluted share was $1.94$0.80 per share for the first quarter of fiscal year-to-date period ended September 28, 2019,2020, compared to diluted$0.56 of net income per diluted share of $1.81 for the first quarter of fiscal year-to-date period ended September 29, 2018. Diluted weighted2019. Weighted average diluted shares outstanding decreased by approximately 410,000309,000 shares to approximately 8,205,0008,037,000 shares for the first quarter of fiscal year-to-date period ended September 28, 20192020 from approximately 8,615,0008,346,000 shares for the first quarter of fiscal year-to-date period ended September 29, 2018.2019. The decrease in weighted average diluted shares outstanding was primarily due to the repurchase of shares of our common stock since the fiscal year-to-datequarter period ended September 29, 2018,March 30, 2019, offset in part by the issuance or vesting of shares of restricted stock and time-vesting restricted stock units, and the exercise of stock options, since the thirdfirst quarter of fiscal 2018.2019.
Liquidity and Capital Resources
Fiscal Year-to-Date Period Ended September 28, 2019
We believe that our current cash, cash equivalents, cash generated from operations, and amounts available under our bank revolving line of credit facility will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 12 months.
General. During the fiscal year-to-date periodquarter ended SeptemberMarch 28, 2019,2020, cash and cash equivalents decreased by $18.2$9.8 million. We completed the period with cash and cash equivalents of $19.8 million and working capital (defined as current assets less current liabilities) of $8.3$15.8 million. The principal drivers of the reduction of cash were paymentpayments of a significant portion of our fiscal 20182019 performance bonuses, in the second quarter of 2019, the funding of forgivable loans, the repurchase of shares, and capital expenditures related to the buildout of the expanded BostonNew York and Toronto office space, as well as the Oakland office space, offset by net borrowings of $36.0$70.0 million under our revolving credit facility.
During the fiscal quarter ended March 28, 2020, working capital (defined as current assets less current liabilities) decreased by $12.6 million to $0.1 million. In addition to the reduction in cash balances noted above, the reduction in working capital is due to the $70.0 million of borrowings during the quarter, a portion of the proceeds from which were used to fund forgivable loan issuances and leasehold improvements, much of which are classified as non-current assets.
Of the total cash and cash equivalents held at SeptemberMarch 28, 2019, $7.82020, $7.1 million was held within the U.S. We have sufficient sources of liquidity in the U.S., including cash from operations and availability onunder our revolving line of credit facility, to fund U.S. activities. At September 28, 2019, we had outstanding borrowings onactivities for the revolving line of credit of $36.0 million.next 12 months.
Sources and Uses of Cash. During the fiscal year-to-date periodquarter ended SeptemberMarch 28, 2019,2020, net cash used in operating activities was $19.9$65.4 million. Net income was $16.0$6.5 million for the fiscal year-to-date periodquarter ended SeptemberMarch 28, 2019.2020. The primary factor in cash used in operations was thea decrease in the "accountsaccounts payable, accrued expenses, and other liabilities" line itemliabilities of our consolidated statement of cash flows of $16.3$39.1 million. Other uses of cash included an increase of $14.6$8.2 million in unbilled receivables, a $5.7$5.3 million increase in prepaid expenses and other current assets, $0.4 million unrealized foreign currency exchange gains, net, and a $5.8$1.2 million decrease in lease liabilities. The change in forgivable loans for the period of $18.9$27.1 million was primarily driven by $32.3$33.4 million of forgivable loan issuances, net of repayments, offset by $13.3$6.3 million of forgivable loan amortization. Offsetting these uses of cash was a $3.5$1.4 million decrease in accounts receivable, net.net, as well as a decrease in incentive cash awards expense of $1.4 million. Cash provided by operations included non-cash depreciation and amortization expense of $7.7$2.9 million, share-based compensation expenses of $2.6$0.7 million, and $7.8$3.0 million in ROU asset amortization.
During the fiscal year-to-date periodquarter ended SeptemberMarch 28, 2019,2020, net cash used in investing activities was $12.5$7.9 million for capital expenditures primarily related to the buildout of the BostonNew York, Toronto, and Cambridge, UKOakland office space.
During the fiscal year-to-date periodquarter ended SeptemberMarch 28, 2019,2020, net cash provided by financing activities was $14.8$64.1 million, primarily as a result of borrowings under the linerevolving credit facility of credit of $36.0$70.0 million, net of repayments, and $2.0$0.2 million received upon the issuance of shares of common stock related to the exercise of stock options. Offsetting these increases in cash were the tax withholding payments reimbursed by restricted shares of $0.4 million, payment of $4.7$1.8 million of cash dividends to shareholders, and $18.1$3.8 million of repurchases of common stock.
Indebtedness
We are party to a credit agreement that provides us with a $125.0 million revolving credit facility and a $15.0 million sublimit for the issuance of letters of credit. We may use the proceeds of the revolving credit facility 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 we must repay allany outstanding borrowings no later than October 24, 2022. There was $36.0$70.0 million in outstanding borrowings under this revolving line of credit facility as of SeptemberMarch 28, 2019.2020.
The amount available under this revolving line of credit facility is reduced by certain letters of credit outstanding, which amounted to $4.4 million as of SeptemberMarch 28, 2019.2020. Borrowings under the revolving credit facility bear interest at a rate per annum, at our election, of either (i) the adjusted base rate, as defined in the credit agreement, plus an applicable margin, which varies between 0.25% and 1.25% 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 1.25% and 2.25% 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 0.20% and 0.35% depending on our total leverage ratio. Borrowings under the revolving 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 $30.7$32.9 million in net assets as of SeptemberMarch 28, 2019.2020.
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 revolving 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 an adjusted consolidated EBITDA to consolidated interest expense ratio of more than 2.5:1.0 and to comply with a consolidated debt to adjusted consolidated EBITDA ratio of not more than 3.0:1.0. 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. A portion of these loans is collateralized by key person life insurance. The forgivable loans have terms that are generally between threetwo 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.
Compensation Arrangements
We have entered into compensation arrangements for the payment of incentive performance awards to certain of our employees and non-employee experts if specific performance targets are met. The amounts of the awards to be paid under these compensation arrangements could fluctuate depending on future performance through the respective measurement periods. Increases in estimated awards are expensed prospectively over the remaining service period. Decreases in estimated awards are recorded in the period incurred. 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 borrowings on our existing revolving credit facility.
Business and Talent Acquisitions
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 will depend on several factors,
including our future profitability, the levels of our debt and equity, restrictions under our existing revolving line of credit with our bank,facility, and the overall credit and equity market environments.
Share Repurchases
In February 2019,2020, our Board of Directors authorized an expansion to our existing share repurchase program, authorizing the purchase of an additional $20.0 million of our common stock. We may repurchase shares under this program in open market purchases (including through any Rule 10b5-1 plan adopted by us) or in privately negotiated transactions in accordance with applicable insider trading and other securities laws and regulations. During the fiscal quarter and fiscal year-to-date period ended SeptemberMarch 28, 2019,2020, we repurchased and retired 157,40282,613 shares, and 421,112 shares, respectively, under our share repurchase program at an average price per share of $41.69 and $42.94, respectively.$46.15. During the fiscal quarter and fiscal year-to-date period ended September 29, 2018,March 30, 2019, we repurchased and retired 215,58586,609 shares, and 378,477 shares, respectively, under our share repurchase program at an average price per share of $55.99 and $53.90, respectively.$50.25. As of SeptemberMarch 28, 2019,2020, we had approximately $3.5$19.7 million available for future repurchases under our share repurchase program. We plan to finance future repurchases with available cash, cash from future operations and funds from our existing revolving credit facility. We expect to continue to repurchase shares under our share repurchase program.
Dividends to Shareholders
We anticipate paying regular quarterly dividends each year. These dividends are anticipated to be funded through cash flow from operations, available cash on hand, and/or borrowings under our revolving credit facility. Although we anticipate paying regular quarterly dividends on our common stock for the foreseeable future, the declaration of any future dividends is subject to the discretion of our Board of Directors. During the fiscal quarterquarters ended March 28, 2020 and fiscal year-to-date period ended September 28,March 30, 2019, we paid dividends and dividend equivalents of $1.5$1.8 million and $4.8 million, respectively. During the fiscal quarter and fiscal year-to-date period ended September 29, 2018, we paid dividends of $1.4 million and $4.3$1.7 million, respectively, to our shareholders.
Impact of Inflation
To date, inflation has not had a material impact on our financial results. There can be no assurance, however, that inflation will not adversely affect our financial results in the future.
Future Capital and Liquidity Needs
We anticipate that our future capital and liquidity needs will principally consist of funds required for:
The hiring of individuals to replenish and expand our employee base is an essential part of our business operations and has historically been funded principally from operations and short-term borrowings.operations. Many of the other above activities are discretionary in nature. For example, capital expenditures can be deferred, acquisitions can be forgone, and share repurchase programs and regular dividends can be suspended. As such, our operating model provides flexibility with respect to the deployment of cash flow from operations. Given this flexibility, we believe that our cash flows from operations, supplemented by cash on hand and borrowings under our bankrevolving credit facility (as necessary), will provide adequate cash to fund our long-term cash needs from normal operations for at least the next twelve months.
Our conclusion that we will be able to fund our cash requirements by using existing capital resources and cash generated from operations does not take into account the impact of any future acquisition transactions or any unexpected significant changes in the number of employees or other expenditures that are currently not contemplated. The anticipated cash needs of our business could change significantly if we pursue and complete additional business acquisitions, if our business plans change, if economic conditions change from those currently prevailing or from those now anticipated (including in connection with the COVID-19 pandemic), or if other unexpected circumstances arise that have a material effect on the cash flow or profitability of our business. Any of these events or circumstances, including any new business opportunities or the length and severity of the COVID-19 pandemic, could involve or result in significant additional funding needs in excess of the identified currently available sources and could require us to raise additional debt or equity funding to meet those needs on terms that may be less favorable compared to our current sources of capital. Our ability to raise additional capital over the next 12 months, if necessary, is subject to a variety of factors that we cannot predict with certainty, including:
Factors Affecting Future Performance
Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Quarterly Report on Form 10-Q, as well as a description of material risks we face, are set forth below under the heading "Risk Factors" and included in Part I—Item 1A "Risk Factors" of the 20182019 Form 10-K. 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.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
For information regarding our exposure to certain market risks see "Item 7A. Quantitative and Qualitative Disclosures about Market Risk," in the 20182019 Form 10-K. Additionally, please see "ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations: COVID-19 Assessment" in this Quarterly Report on Form 10-Q for an additional discussion on the COVID-19 pandemic and the potential impact it may have on our business, financial condition and results of operations.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. This is done in order to ensure that information we are required to disclose in the reports that are filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Based upon that evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of SeptemberMarch 28, 2019,2020, due to the material weaknesses in internal control over financial reporting related to the inadequate design or execution of internal controls over: 1) our incentive-based compensation liabilities, as it relates to our internal controls over the review of the completeness and accuracy of: 1) our contingent consideration and incentive-based compensation liabilities, including our internal controls over revenue forecasts and certain other assumptions used inof key inputs into the computation of these liabilities; 2) certain aspects of accounting for revenue and related reserves;accounts; and 3) the completeness of certain accounts payable and expense accruals; and 4) the evaluation of certain technical tax mattersaccruals described in Item 9A of the 20182019 Form 10-K.
Notwithstanding these material weaknesses, management has concluded that the condensed consolidated financial statements included in this quarterly report on Form 10-Q present fairly, in all material aspects, our financial position at the end of, and the results of operations and cash flows for, the periods presented in conformity with accounting principles generally accepted in the United States.
Evaluation of Changes in Internal Control over Financial Reporting
Under the supervision and with the participation of our management, including our President and Chief Executive Officer and Chief Financial Officer, we evaluated whether there were any changes in our internal control over financial reporting during the thirdfirst quarter of fiscal 2019.2020, including any changes related to COVID-19 and the transition to our remote working environment. Except for the ongoing remediation of the material weaknesses in internal controls over financial reporting noted above pursuant to the plan described in Item 9A of the 20182019 Form 10-K, there were no changes in our internal control over financial reporting identified in connection with the above evaluation that occurred during the thirdfirst quarter of fiscal 2019,2020, that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
Plan for Remediation of Material Weakness
We are committed to remediating the control deficiencies that gave rise to the material weaknesses described above. Management is responsible for implementing changes and improvements to our internal control over financial reporting and for remediating the control deficiencies that gave rise to these material weaknesses. During fiscal 2019,2020, we are enhancing our system of internal controls over financial reporting withby implementing the following actions:
Table of Contents2019 Form 10-K.
Important Considerations
The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to various inherent limitations, including judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these limitations, there can be no assurance that any system of disclosure controls and procedures or internal control over financial reporting will be successful in preventing all errors or
fraud or in making all material information known in a timely manner to the appropriate levels of management.
PART II. OTHER INFORMATION
None.
There hasare many risks and uncertainties that can affect our future business, financial performance or results of operations. In addition to the other information set forth in this report, please review and consider the information regarding certain factors that could materially affect our business, financial condition or future results set forth under Part I, Item 1A "Risk Factors" in our 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2020. Except as noted below, there have been no material change in anychanges to these risk factors previously disclosedduring the quarter ended March 28, 2020.
The COVID-19 pandemic and resulting adverse economic conditions could have a material adverse impact on our business, financial condition and results of operations.
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and the United States government-imposed travel restrictions on travel between the United States, Europe and other countries. In addition, the states and countries in onwhich our offices are located have implemented stay-at-home orders requiring everyone to stay-at-home, except to obtain or provide essential services. Many businesses, including those of our clients, have responded with their own work-from-home policies and/or indefinite closures.
We intend to continue to provide our services to our clients for the 2018 Form 10-K. See "Risk Factors"duration of these orders and closures. However, the timing of projects may be delayed or otherwise disrupted due to the length and severity of the current closures and any other restrictions or limitations implemented in the 2018 Form 10-Kfuture. The COVID-19 virus poses the risk that we or our employees, our non-employee experts, governmental agencies, clients, and parties otherwise engaged in the delivery of our services may be prevented from conducting business activities in the ordinary course for an indefinite period. Extended shutdowns or other restrictions could also adversely limit our business operations or increase our costs.
The spread of COVID-19, which has caused a complete descriptionbroad impact globally, may materially affect us economically. While the potential economic impact brought by the duration of COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the material risks we face.future negatively affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and value of our common stock.
The global pandemic of COVID-19 continues to evolve rapidly. The ultimate impact of COVID-19 or a similar health epidemic or pandemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business or the global economy. As a result, the COVID-19 pandemic may affect our operating and financial results in a manner that is not presently known to us.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) The following table provides information about our repurchases of shares of our common stock during the fiscal quarter ended SeptemberMarch 28, 2019.2020. During that period, we did not act in concert with any affiliate or any other person to acquire any of our common stock and, accordingly, we do not believe that purchases by any such affiliate or other person (if any) are reportable in the following table. For purposes of this table, we have divided the fiscal quarter into three periods of four weeks, four weeks, and five weeks, respectively, to coincide with our reporting periods during the thirdfirst quarter of fiscal 2019.
Table of Contents2020.
Issuer Purchases of Equity Securities
Period | (a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, 2019 to July 27, 2019 | — | — | — | $ | 10,075,100 | ||||||||
July 28, 2019 to August 24, 2019 | 157,402 | $ | 41.69 | 157,402 | $ | 10,075,100 | |||||||
August 25, 2019 to September 28, 2019 | — | — | — | $ | 3,512,496 |
Period | (a) Total Number of Shares Purchased(1)(2) | (b) Average Price Paid per Share(1)(2) | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) | (d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs(2) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 29, 2019 to January 25, 2020 | — | — | — | $ | 23,512,496 | ||||||||
January 26, 2020 to February 22, 2020 | 3,658 | $ | 53.39 | — | $ | 23,512,496 | |||||||
February 23, 2020 to March 28, 2020 | 86,798 | $ | 46.17 | 82,613 | $ | 19,699,613 |
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
None.
None.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CRA INTERNATIONAL, INC. | ||||
Date: | By: | /s/ PAUL A. MALEH Paul A. Maleh President and Chief Executive Officer | ||
Date: | By: | /s/ Chief Financial Officer, Executive Vice President and Treasurer | ||
Date: | By | /s/ DOUGLAS C. MILLER Douglas C. Miller Vice President and Chief Accounting Officer |