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 February 19, 2010 | ||
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, T-33, Boston, MA | 02116-5092 | |
| (Address of principal executive offices) | (Zip Code) |
(617) 425-3000
(Registrant's telephone number, including area code)
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 and posted on its corporate Web site, if any, 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 and post such files) Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer ý | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company 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 March 25, 2010 | |
|---|---|---|
| Common Stock, no par value per share | 11,040,782 shares |
2
CRA International, Inc.
Condensed Consolidated Statements of Operations (unaudited)
(In thousands, except per share data)
| | Twelve Weeks Ended | |||||||
|---|---|---|---|---|---|---|---|---|
| | February 19, 2010 | February 20, 2009 | ||||||
Revenues | $ | 58,846 | $ | 65,821 | ||||
Costs of services | 40,454 | 43,069 | ||||||
Gross profit | 18,392 | 22,752 | ||||||
Selling, general and administrative expenses | 15,794 | 17,268 | ||||||
Depreciation and amortization | 1,258 | 1,913 | ||||||
Income from operations | 1,340 | 3,571 | ||||||
Interest income | 79 | 157 | ||||||
Interest expense | (870 | ) | (1,052 | ) | ||||
Other income (expense) | (14 | ) | (69 | ) | ||||
Income before provision for income taxes | 535 | 2,607 | ||||||
Provision for income taxes | (436 | ) | (2,261 | ) | ||||
Net income | 99 | 346 | ||||||
Net loss attributable to noncontrolling interest, net of tax | 167 | 188 | ||||||
Net income attributable to CRA International, Inc. | $ | 266 | $ | 534 | ||||
Net income per share attributable to CRA International, Inc.: | ||||||||
Basic | $ | 0.02 | $ | 0.05 | ||||
Diluted | $ | 0.02 | $ | 0.05 | ||||
Weighted average number of shares outstanding: | ||||||||
Basic | 10,654 | 10,559 | ||||||
Diluted | 10,835 | 10,657 | ||||||
See accompanying notes to the condensed consolidated financial statements.
3
CRA International, Inc.
Condensed Consolidated Balance Sheets (unaudited)
(In thousands, except share data)
| | February 19, 2010 | November 28, 2009 | ||||||
|---|---|---|---|---|---|---|---|---|
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 80,057 | $ | 82,806 | ||||
Short-term investments | 33,232 | 23,678 | ||||||
Accounts receivable, net of allowances of $7,083 in 2010 and $6,812 in 2009 | 49,089 | 60,200 | ||||||
Unbilled services | 27,252 | 28,022 | ||||||
Prepaid expenses and other assets | 17,357 | 18,381 | ||||||
Deferred income taxes | 16,196 | 16,695 | ||||||
Total current assets | 223,183 | 229,782 | ||||||
Property and equipment, net | 18,155 | 19,050 | ||||||
Goodwill | 141,165 | 141,964 | ||||||
Intangible assets, net of accumulated amortization of $4,574 in 2010 and $5,205 in 2009 | 4,139 | 6,162 | ||||||
Deferred income taxes, net of current portion | 61 | 63 | ||||||
Other assets | 25,203 | 25,090 | ||||||
Total assets | $ | 411,906 | $ | 422,111 | ||||
Liabilities and shareholders' equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 10,237 | $ | 13,425 | ||||
Accrued expenses | 52,379 | 56,951 | ||||||
Deferred revenue and other liabilities | 8,472 | 7,002 | ||||||
Current portion of deferred compensation | 221 | 889 | ||||||
Current portion of notes payable | 700 | 700 | ||||||
Deferred income taxes | 356 | 125 | ||||||
Total current liabilities | 72,365 | 79,092 | ||||||
Notes payable, net of current portion | 2,410 | 2,405 | ||||||
Convertible debentures payable, net | 60,609 | 60,289 | ||||||
Deferred rent and other non-current liabilities | 12,714 | 13,964 | ||||||
Deferred compensation | 1,523 | 1,524 | ||||||
Deferred income taxes, net of current portion | 8,334 | 9,122 | ||||||
Commitments and contingencies | ||||||||
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; 10,695,955 and 10,639,249 shares issued and outstanding in 2010 and 2009, respectively | 102,664 | 102,392 | ||||||
Receivables from employees | (1,581 | ) | (1,854 | ) | ||||
Retained earnings | 157,055 | 156,789 | ||||||
Accumulated other comprehensive income (loss) | (5,641 | ) | (3,215 | ) | ||||
Total CRA International, Inc. shareholders' equity | 252,497 | 254,112 | ||||||
Noncontrolling interest | 1,454 | 1,603 | ||||||
Total shareholders' equity | 253,951 | 255,715 | ||||||
Total liabilities and shareholders' equity | $ | 411,906 | $ | 422,111 | ||||
See accompanying notes to the condensed consolidated financial statements.
4
CRA International, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
| | Twelve Weeks Ended | |||||||
|---|---|---|---|---|---|---|---|---|
| | February 19, 2010 | February 20, 2009 | ||||||
Operating activities: | ||||||||
Net income | $ | 99 | $ | 346 | ||||
Adjustments to reconcile net income to net cash provided by operating activities, net of effect of acquired business: | ||||||||
Depreciation and amortization | 1,269 | 2,015 | ||||||
Loss on disposal of property and equipment | — | 16 | ||||||
Deferred rent | (1,168 | ) | (935 | ) | ||||
Share-based compensation expenses | 1,661 | 1,079 | ||||||
Excess tax benefits from share-based compensation | (45 | ) | — | |||||
Deferred income taxes | 569 | 333 | ||||||
Noncash interest from discount on convertible debentures | 317 | 358 | ||||||
Foreign currency exchange loss | — | 390 | ||||||
Changes in operating assets and liabilities, exclusive of acquisitions: | ||||||||
Accounts receivable | 10,242 | 11,049 | ||||||
Unbilled services | 375 | 6,575 | ||||||
Prepaid expenses and other assets | (46 | ) | 298 | |||||
Accounts payable, accrued expenses, and other liabilities | (4,877 | ) | 2,785 | |||||
Net cash provided by operating activities | 8,396 | 24,309 | ||||||
Investing activities: | ||||||||
Purchase of property and equipment | (620 | ) | (307 | ) | ||||
Additional consideration relating to acquisitions, net | (739 | ) | (746 | ) | ||||
Sale of investments | 23,739 | — | ||||||
Purchase of investments | (33,201 | ) | — | |||||
Net cash used in investing activities | (10,821 | ) | (1,053 | ) | ||||
Financing activities: | ||||||||
Excess tax benefits from share-based compensation | 45 | — | ||||||
Tax withholding payment reimbursed by restricted shares | (535 | ) | (453 | ) | ||||
Issuance of common stock upon exercise of stock options | 225 | — | ||||||
Repurchase of common stock | (37 | ) | (4 | ) | ||||
Net cash used in financing activities | (302 | ) | (457 | ) | ||||
Effect of foreign exchange rates on cash and cash equivalents | (22 | ) | 136 | |||||
Net increase (decrease) in cash and cash equivalents | (2,749 | ) | 22,935 | |||||
Cash and cash equivalents at beginning of period | 82,806 | 119,313 | ||||||
Cash and cash equivalents at end of period | $ | 80,057 | $ | 142,248 | ||||
Supplemental cash flow information: | ||||||||
Cash paid for income taxes | $ | 114 | $ | 615 | ||||
Cash paid for interest | $ | 944 | $ | 1,190 | ||||
See accompanying notes to the condensed consolidated financial statements.
5
CRA International, Inc.
Condensed Consolidated Statement of Shareholders' Equity (unaudited)
(In thousands, except share data)
| | Common Stock | | | | CRA International, Inc. Shareholders' Equity | | | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | Accumulated Other Comprehensive Income (Loss) | | | ||||||||||||||||||||
| | Shares Issued | Amount | Receivables from Shareholders | Retained Earnings | Noncontrolling Interest | Total Shareholders' Equity | |||||||||||||||||||
BALANCE AT NOVEMBER 28, 2009 | 10,639,249 | $ | 102,392 | $ | (1,854 | ) | $ | 156,789 | $ | (3,215 | ) | $ | 254,112 | $ | 1,603 | $ | 255,715 | ||||||||
Net income (loss) | — | — | — | 266 | — | 266 | (167 | ) | 99 | ||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | (2,426 | ) | (2,426 | ) | — | (2,426 | ) | ||||||||||||||
Comprehensive income (loss) | — | — | — | 266 | (2,426 | ) | (2,160 | ) | (167 | ) | (2,327 | ) | |||||||||||||
Exercise of stock options | 15,000 | 225 | — | — | — | 225 | — | 225 | |||||||||||||||||
Share-based compensation expense for employees | — | 1,576 | — | — | — | 1,576 | — | 1,576 | |||||||||||||||||
Restricted share vesting | 67,934 | — | — | — | — | — | — | — | |||||||||||||||||
Redemption of vested employee restricted shares for tax withholding | (24,767 | ) | (654 | ) | — | — | — | (654 | ) | — | (654 | ) | |||||||||||||
Tax deficit on stock options and restricted share vesting | — | (903 | ) | — | — | — | (903 | ) | — | (903 | ) | ||||||||||||||
Payments received on notes receivable from shareholders | — | — | 273 | — | — | 273 | — | 273 | |||||||||||||||||
Shares repurchased | (1,461 | ) | (37 | ) | — | — | — | (37 | ) | — | (37 | ) | |||||||||||||
Share-based compensation expense for non-employees | — | 65 | — | — | — | 65 | — | 65 | |||||||||||||||||
Equity transactions of noncontrolling interest | — | — | — | — | — | — | 18 | 18 | |||||||||||||||||
BALANCE AT FEBRUARY 19, 2010 | 10,695,955 | $ | 102,664 | $ | (1,581 | ) | $ | 157,055 | $ | (5,641 | ) | $ | 252,497 | $ | 1,454 | $ | 253,951 | ||||||||
See accompanying notes to the condensed consolidated financial statements.
6
CRA International, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Description of Business
CRA International, Inc. (the "Company," or "CRA") is a worldwide leading economic, financial, and management consulting services firm that applies advanced analytic techniques and in-depth industry knowledge to complex engagements for a broad range of clients. CRA offers its services in two broad areas: litigation, regulatory and financial consulting and business consulting. CRA operates in one business segment, which is consulting services. As of September 1, 2009, CRA operates its business under its registered trade name, Charles River Associates.
2. Adoption of New Accounting Standards
Convertible Bonds
In May 2008, the FASB issued guidance included in Accounting Standards Codification ("ASC") Topic 470-20, "Debt", formerly FASB Staff Position ("FSP") No. Accounting Principles Board Opinion 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)", which changes the accounting treatment for convertible debt instruments that allow for either mandatory or optional cash settlements. The new provisions of ASC Topic 470-20 require the Company to recognize non-cash interest expense on the convertible senior subordinated debentures based on the market rate for similar debt instruments without the conversion feature. The effective interest rate for the first quarters of fiscal 2010 and fiscal 2009 was 5.6%. The new provisions of ASC Topic 470-20 are effective for fiscal years beginning on or after December 15, 2008, which is the Company's fiscal 2010, and must be applied on a retrospective basis. Upon retroactive adoption of ASC 470-20 during the first quarter of fiscal 2010, the Company recorded a cumulative after tax adjustment for prior years of $6.4 million, which represented a non-cash decrease in retained earnings as of November 28, 2009. Also, the carrying amount of the convertible debentures was retroactively adjusted to reflect a discount of approximately $12.6 million and a reduction of deferred financing costs of approximately $0.5 million, with offsetting increases in common stock of approximately $6.9 million and deferred tax liability of $5.2 million as of the date of issuance. The effect of adopting ASC Topic 470-20 is included in the accompanying condensed consolidated financial statements.
For the first quarters of fiscal 2010 and fiscal 2009, the contractual interest, amortization of prepaid debt issuance costs, and amortization of the discount, included in interest expense was $0.8 million and $1.0 million, respectively. For the first quarters of fiscal 2010 and fiscal 2009, the incremental amortization of the discount included in interest expense as a result of adopting ASC Topic 470-20 was $0.3 million and $0.4 million, respectively. The adoption had a net impact on basic and diluted earnings in the first quarters of fiscal 2010 and fiscal 2009 of $0.02 per share.
Noncontrolling Interest
In December 2007, the FASB issued guidance included in ASC Topic 810, "Consolidation" (formerly Statements of Financial Accounting Standards ("SFAS") No. 160). ASC Topic 810 establishes accounting and reporting standards for noncontrolling interests (previously referred to as "minority interests") in a subsidiary and for the deconsolidation of a subsidiary, to ensure consistency with the requirements of ASC Topic 805, "Business Combinations". ASC Topic 810 states that noncontrolling interests should be classified as a separate component of equity, and establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the
7
CRA International, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
2. Adoption of New Accounting Standards (Continued)
parent and the interests of the noncontrolling owners. The Company adopted the provisions of ASC Topic 810 during the first quarter of fiscal 2010 and the new presentation and disclosure requirements were applied retrospectively for all periods presented. Upon adoption, certain prior period amounts have been reclassified to conform to the current period financial statement presentation, including the reclassification of $1.6 million to shareholders' equity from non-current liabilities.
Business Combinations
In December 2007, the FASB issued guidance included in ASC Topic 805 (formerly FSP SFAS No. 141R-1), which amends and clarifies SFAS No. 141R, "Business Combinations"). The new provisions of ASC Topic 805 require the acquiring entity in a business combination to record all assets acquired and liabilities assumed at their respective acquisition-date fair values if fair value can be reasonably estimated, changes the recognition of assets acquired and liabilities assumed arising from contingencies, changes the recognition and measurement of contingent consideration, and requires the expensing of acquisition-related costs as incurred. If fair value cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with ASC Topic 450, "Contingencies". ASC Topic 805 also requires additional disclosure of information surrounding a business combination, such that users of the entity's financial statements can fully understand the nature and financial impact of the business combination. The new provisions of ASC Topic 805 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, which is the Company's fiscal 2010. An entity may not apply the new provisions of ASC Topic 805 before that date. The Company adopted the new provisions of ASC Topic 805 in the first quarter of fiscal 2010. For business combinations completed in the future, the application of the new provisions of this topic could have a significant impact on the Company's consolidated statement of operations and financial condition, the magnitude of which will depend on the specific terms and conditions of the transactions.
3. Unaudited Interim Condensed Consolidated Financial Statements and Estimates
The condensed consolidated statements of operations for the twelve weeks ended February 19, 2010 and February 20, 2009, the condensed consolidated balance sheet as of February 19, 2010, the condensed consolidated statements of cash flows for the twelve weeks ended February 19, 2010 and February 20, 2009, and the condensed consolidated statement of shareholders' equity for the twelve weeks ended February 19, 2010, are unaudited. The November 28, 2009 consolidated balance sheet is derived from CRA's audited consolidated financial statements included in its Annual Report on Form 10-K as of that date and has been adjusted pursuant to Note 2. In the opinion of management, these statements include all adjustments necessary for a fair presentation of CRA's consolidated financial position, results of operations, and cash flows.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make significant estimates and judgments that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates in these consolidated financial statements include, but are not limited to, accounts receivable allowances, revenue recognition on fixed price contracts, depreciation of property
8
CRA International, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
3. Unaudited Interim Condensed Consolidated Financial Statements and Estimates (Continued)
and equipment, share-based compensation, valuation of acquired intangible assets, impairment of long lived assets, goodwill, accrued and deferred income taxes, valuation allowances on deferred tax assets, accrued bonuses, accrued exit costs, and other accrued expenses. These items are monitored and analyzed by the Company 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 estimates if CRA's assumptions based on past experience or other assumptions do not turn out to be substantially accurate.
4. Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. In addition, the consolidated financial statements include the Company's interest in NeuCo, Inc. ("NeuCo"). All significant intercompany accounts have been eliminated.
The Company's ownership interest in NeuCo is 49.15% and combined with CRA's officers holding three Board of Director seats and other considerations, CRA's ownership constitutes control under GAAP. As a result, NeuCo's financial results have been consolidated with CRA and the portion of NeuCo's results allocable to its other owners is shown as "noncontrolling interest".
NeuCo's interim reporting schedule is based on calendar month-ends, but its fiscal year end is the last Saturday of November. The first three quarters of CRA's fiscal year could include up to a three-week reporting lag between CRA's quarter end and the most recent financial statements available from NeuCo. CRA does not believe the reporting lag will have a significant impact on CRA's consolidated statements of income or financial condition.
5. Fiscal Year
CRA's fiscal year ends on the last Saturday in November, and accordingly, its fiscal year will periodically contain 53 weeks rather than 52 weeks. Both fiscal 2010 and fiscal 2009 are 52-week years. In a 52-week year, each of CRA's first, second, and fourth quarters includes twelve weeks, and its third quarter includes sixteen weeks. In a 53-week year, the fourth quarter includes thirteen weeks.
6. Cash Equivalents and Investments
Cash equivalents consist principally of U.S. government obligations, funds holding only U.S. government obligations, money market funds, and corporate obligations with maturities when purchased of three months or less. Short-term investments generally consist of U.S. and Canadian government bonds and corporate obligations and have maturities when purchased of more than three months and less than one year. These short-term investments are classified as held-to-maturity. The carrying amount of instruments classified as cash equivalents and short-term investments are stated at amortized cost, which approximates fair value. As of February 19, 2010, short-term investments included $20.4 million in U.S. government bonds, $8.0 million in corporate obligations, and $4.8 million in Canadian government bonds. Long-term investments, if any, are intended to be held to maturity, and generally consist of government bonds with maturities of more than one year but less than two years.
9
CRA International, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
6. Cash Equivalents and Investments (Continued)
If a decline in fair value below the amortized cost basis of an investment is judged to be other-than-temporary, the cost basis of the investment is written down to fair value. For those investments for which the fair value of the investment is less than its amortized cost, the Company does not intend to sell such investment and it is more likely than not that it will not be required to sell such investment prior to the recovery of its amortized cost basis less any current period credit losses. The credit-related portion of other-than-temporary impairment losses is recognized in earnings while the noncredit-related portion is recognized in other comprehensive income, net of related taxes. During the first quarter of fiscal 2010, the Company did not write-down any investment balances.
7. Revenue Recognition
CRA derives substantially all of its revenues from the performance of professional services. The contracts that CRA enters into and operates under specify whether the engagement will be billed on a time-and-materials or a fixed-price basis. These engagements generally last three to six months, although some of CRA's engagements can be much longer in duration. Each contract must be approved by one of CRA's vice presidents.
CRA recognizes substantially all of its revenues under written service contracts with its clients where the fee is fixed or determinable, as the services are provided, and only in those situations where collection from the client is reasonably assured and sufficient contractual documentation has been obtained. In certain cases CRA provides services to its clients without sufficient contractual documentation, or fees are tied to performance-based criteria, which require the Company to defer revenue in accordance with U.S. GAAP. In these cases, these amounts are fully reserved until all criteria for recognizing revenue are met.
Most of CRA's revenue is derived from time-and-materials service contracts. Revenues from time-and-materials service contracts are recognized as services are provided based upon hours worked and contractually agreed-upon hourly rates, as well as a computer services fee based upon hours worked.
Revenues from the majority of the Company's fixed-price engagements are recognized on a proportional performance method based on the ratio of costs incurred, substantially all of which are labor-related, to the total estimated project costs. CRA derived 15.1% and 9.9% of revenues from fixed-price engagements in the twelve weeks ended February 19, 2010 and February 20, 2009, respectively. Project costs are based on the direct salary of the consultants on the engagement plus all direct expenses incurred to complete the engagement that are not reimbursed by the client. The proportional performance method is used since reasonably dependable estimates of the revenues and costs applicable to various stages of a contract can be made, based on historical experience and terms set forth in the contract, and are indicative of the level of benefit provided to CRA's clients. Fixed-price contracts generally include a termination provision that converts the agreement to a time-and-materials contract in the event of termination of the contract. CRA's management maintains contact with project managers to discuss the status of the projects and, for fixed-price engagements, management is updated on the budgeted costs and resources required to complete the project. These budgets are then used to calculate revenue recognition and to estimate the anticipated income or loss on the project. CRA has occasionally been required to commit unanticipated additional resources to complete projects, which have resulted in lower than anticipated income or losses on those contracts. CRA may experience
10
CRA International, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
7. Revenue Recognition (Continued)
similar situations in the future. Provisions for estimated losses on contracts are made during the period in which such losses become probable and can be reasonably estimated. To date, such losses have not been significant.
Revenues also include reimbursable expenses, which include travel and other out-of-pocket expenses, outside consultants, and other reimbursable expenses. Reimbursable expenses are as follows (in thousands):
| | Twelve Weeks Ended | ||||||
|---|---|---|---|---|---|---|---|
| | February 19, 2010 | February 20, 2009 | |||||
Reimbursable expenses | $ | 8,266 | $ | 8,920 | |||
CRA maintains accounts receivable allowances for estimated losses resulting from clients' failure to make required payments. The Company bases its estimates on historical collection experience, current trends, and credit policy. In determining these estimates, CRA examines historical write-offs of its receivables and reviews client accounts to identify any specific customer collection issues. If the financial condition of CRA's customers were to deteriorate, resulting in an impairment of their ability to make payment, or if disputes were to arise regarding the services provided, additional allowances may be required.
Unbilled services represent revenue recognized by CRA for services performed but not yet billed to the client. Deferred revenue represents amounts billed or collected in advance of services rendered.
CRA collects goods and services and value added taxes from customers and records these amounts on a net basis, which is within the scope of ASC Topic 605-45, "Principal Agent Considerations".
8. Goodwill
Goodwill represents the purchase price of acquired businesses in excess of the fair market value of net assets acquired. In accordance with ASC Topic 350, "Goodwill and Other Intangible Assets", goodwill is not subject to amortization, but is monitored at least annually for impairment, or more frequently, as necessary, if there are other indicators of impairment. Any impairment would be measured based upon the fair value of the related asset. Under ASC Topic 350, in performing the first step of the goodwill impairment testing and measurement process, the Company compares its entity-wide estimated fair value to its net book value to identify potential impairment. Management estimates the entity-wide fair value utilizing the Company's market capitalization, plus an appropriate control premium. The Company utilizes a control premium which considers appropriate industry, market and other pertinent factors, including indications of such premiums from data on recent acquisition transactions. If the Company determines through the impairment evaluation process that goodwill has been impaired, an impairment charge would be recorded in the consolidated statement of operations. The Company completed the annual impairment test required as of November 28, 2009 and determined that there was no impairment. The Company will continue to closely monitor its market capitalization and in the event that the Company's average stock price subsequently declines and its market capitalization plus control premium declines below net book value and remains below book
11
CRA International, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
8. Goodwill (Continued)
value for a period we consider to be other-than-temporary, the Company will perform an evaluation of the carrying value of goodwill and other intangibles.
The changes in the carrying amount of goodwill during the twelve weeks ended February 19, 2010, are as follows (in thousands):
Balance at November 28, 2009 | $ | 141,964 | ||
Goodwill adjustments related to acquisitions | (84 | ) | ||
Goodwill adjustments related to NeuCo | 1,191 | |||
Effect of foreign currency translation and other adjustments | (1,906 | ) | ||
Balance at February 19, 2010 | $ | 141,165 | ||
9. Private Placement of Convertible Debt
In 2004, CRA completed a private placement of $90.0 million of 2.875% convertible senior subordinated debentures due in 2034. During fiscal 2009 and fiscal 2008, the Company repurchased convertible debentures in the principal amount of approximately $27.5 million, on the open market. As of February 19, 2010, the principal amount of the convertible debentures totaled $62.5 million. The debentures are CRA's direct, unsecured senior subordinated obligations and rank junior in right of payment to CRA's existing bank revolving line of credit and any future secured indebtedness that CRA may designate as senior indebtedness. Pursuant to the terms of the indenture governing the debentures, since the closing stock price did not equal or exceed the $50 per share contingent conversion trigger price for 20 out of the 30 consecutive trading days ended on February 19, 2010, the market price conversion trigger was not satisfied and holders of the debentures are not able to exercise their right to convert the bonds during the second quarter of fiscal 2010. This test is repeated each fiscal quarter. To date, no conversions have occurred.
The Company has a $60.0 million revolving line of credit, to mitigate the potential liquidity risk, and to provide funding if required, in the event of conversion by the debenture holders. The amounts available under the bank revolving line of credit are constrained by various financial covenants and reduced by certain outstanding letters of credit. CRA believes that in the event the contingent conversion trigger price is met, it is unlikely that a significant percentage of bondholders will exercise their right to convert because the debentures have traded at a premium over their conversion value. Since holders of the debentures are not able to exercise their right to convert the bonds as of February 19, 2010, CRA has classified the $60.6 million convertible debt as long-term debt as of February 19, 2010 in the accompanying condensed consolidated balance sheet. In addition, the line of credit gives CRA additional flexibility to meet any unforeseen financial requirements.
The $60.6 million convertible debt balance as of February 19, 2010 represents the principal amount of $62.5 million, net of the unamortized debt discount totaling $1.9 million. The $60.3 million convertible debt balance as of November 28, 2009 represents the principal amount of $62.5 million, net of the unamortized debt discount totaling $2.2 million. The debt discount will be amortized through the third quarter of fiscal 2011. For both the first quarter of fiscal 2010 and the year ended fiscal 2009, the carrying amount of the equity component of the convertible debentures was $7.6 million and is included in common stock.
12
CRA International, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
9. Private Placement of Convertible Debt (Continued)
The contingent interest feature included in the debenture represents an embedded derivative that must be recorded at fair value. The Company has determined that the fair value of the contingent interest feature isde minimis as of February 19, 2010, based upon economic, market and other conditions in effect as of that date. There are no other embedded derivatives associated with the Company's convertible debentures.
The Company has agreed with the debenture holders to reserve the maximum number of shares of common stock that may be issued upon conversion of the debentures.
10. Net Income per Share
Basic net income per share represents net income divided by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share represents net income divided by the weighted average shares of common stock and common stock equivalents outstanding during the period. Common stock equivalents arise from stock options, unvested restricted shares, and shares underlying CRA's debentures using the treasury stock method. Under the treasury stock method, the amount the Company will receive for the share awards, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares at the average share price for each fiscal period. A reconciliation of basic to diluted weighted average shares of common stock outstanding is as follows (in thousands):
| | Twelve Weeks Ended | ||||||
|---|---|---|---|---|---|---|---|
| | February 19, 2010 | February 20, 2009 | |||||
Basic weighted average shares outstanding | 10,654 | 10,559 | |||||
Common stock equivalents: | |||||||
Stock options and restricted shares | 181 | 98 | |||||
Diluted weighted average shares outstanding | 10,835 | 10,657 | |||||
Since CRA is obligated to settle the par value of the convertible debentures in cash, the Company is not required to include any shares underlying the convertible debentures in its diluted weighted average shares outstanding until the average stock price per share for the quarter exceeds the $40 conversion price and only to the extent of the additional shares CRA may be required to issue in the event CRA's conversion obligation exceeds the principal amount of the debentures converted. At such time, only the number of shares that would be issuable (under the "treasury" method of accounting for share dilution) are included, which is based upon the amount by which the average stock price exceeds the conversion price. Since the average stock price was $26.17 for the twelve weeks ended February 19, 2010, no common stock equivalents for shares underlying the debentures were included in the diluted weighted average shares outstanding for the twelve weeks ended February 19, 2010. Since the average stock price was $24.57 for the twelve weeks ended February 20, 2009, no common stock equivalents for shares underlying the debentures were included in the diluted weighted average shares outstanding for the twelve weeks ended February 20, 2009.
13
CRA International, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
10. Net Income per Share (Continued)
For the twelve weeks ended February 19, 2010 the anti-dilutive share based awards were 983,192. For the twelve weeks ended February 20, 2009 the anti-dilutive share based awards were 934,989.
During the twelve weeks ended February 19, 2010, CRA granted restricted share awards representing 8,209 shares of its common stock that were not vested as of February 19, 2010.
11. Comprehensive Income
A reconciliation of comprehensive income (loss) is as follows (in thousands):
| | Twelve Weeks Ended | ||||||
|---|---|---|---|---|---|---|---|
| | February 19, 2010 | February 20, 2009 | |||||
Net income | $ | 99 | $ | 346 | |||
Change in foreign currency translation | (2,426 | ) | (2,857 | ) | |||
Comprehensive income (loss) | $ | (2,327 | ) | $ | (2,511 | ) | |
Comprehensive loss attributable to noncontrolling interest | 167 | 188 | |||||
Comprehensive income (loss) attributable to CRA International, Inc. | $ | (2,160 | ) | $ | (2,323 | ) | |
12. Income Taxes
The Company's effective income tax rate was 81.5% and 86.7% for the twelve weeks ended February 19, 2010 and February 20, 2009, respectively. The effective tax rate in both periods was higher than the expected statutory rate primarily due to losses in foreign locations that provided no tax benefit. In addition, the effective rate in the first quarter of fiscal 2009 was unfavorably impacted by a non-recurring discrete item relating to the liquidation of the Company's Australian-based operations.
13. Accrued Expenses
Accrued expenses consist of the following (in thousands):
| | February 19, 2010 | November 28, 2009 | |||||
|---|---|---|---|---|---|---|---|
Compensation and related expenses | $ | 45,233 | $ | 47,010 | |||
Payable to former shareholders | — | 885 | |||||
Income taxes payable | 1,450 | 1,254 | |||||
Accrued interest | 374 | 859 | |||||
Other | 5,322 | 6,943 | |||||
Total | $ | 52,379 | $ | 56,951 | |||
14. Commitments & Contingencies
In connection with an acquisition completed in fiscal 2009, CRA agreed to pay incentive performance awards to certain employees of the acquired business, if specific performance targets are
14
CRA International, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
14. Commitments & Contingencies (Continued)
met in fiscal 2010 through fiscal 2012. In addition, in connection with an acquisition completed during fiscal 2006, CRA agreed to pay additional consideration, contingent upon the achievement of specific performance targets. CRA believes that it will have sufficient funds to satisfy any obligations related to the incentive performance awards and contingent consideration. CRA expects to fund these payments, if any, from existing cash resources, cash generated from operations, or financing transactions.
15. Restructuring Charges and Subsequent Events
During fiscal 2009 and fiscal 2008, the Company recorded restructuring charges associated principally with the divesture of its Australian and New Zealand-based operations and capital projects practice, office vacancies, and employee workforce reductions. The reserve balance for the quarter ended February 19, 2010 is as follows (in thousands):
| | Divested Operations | Office Vacancies | Employee Workforce Reduction | Total Restructuring | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at November 28, 2009 | $ | 55 | $ | 2,158 | $ | 1,266 | $ | 3,479 | |||||
Amounts paid in the fiscal year to date period ending February 19, 2010 | — | (312 | ) | (141 | ) | (453 | ) | ||||||
Adjustments and effect of foreign currency translation in the fiscal year to date period ending February 19, 2010 | — | (20 | ) | (39 | ) | (59 | ) | ||||||
Balance at February 19, 2010 | $ | 55 | $ | 1,826 | $ | 1,086 | $ | 2,967 | |||||
During the first quarter of fiscal 2009, the Company completed an employee workforce reduction and recorded $0.8 million in employee separation costs, of which $0.5 million is included in cost of sales and $0.3 million is included in selling, general and administrative expenses. The restructuring expenses for the first quarter of fiscal 2009 and the reserve balance for the quarter ended February 20, 2009 are as follows (in thousands):
| | Divested operations | Office Vacancies | Employee Workforce Reduction | Total Restructuring | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at November 29, 2008 | $ | 1,000 | $ | 318 | $ | 1,995 | $ | 3,313 | |||||
Charges incurred in the quarter ended February 20, 2009 | — | — | 779 | 779 | |||||||||
Amounts paid in the quarter ended February 20, 2009 | (401 | ) | (242 | ) | (1,424 | ) | (2,067 | ) | |||||
Adjustments and effect of foreign currency translation in the quarter ended February 20, 2009 | 27 | (191 | ) | (1 | ) | (165 | ) | ||||||
Balance at February 20, 2009 | $ | 626 | $ | (115 | ) | $ | 1,349 | $ | 1,860 | ||||
In addition, during the first quarter of fiscal 2009, the Company liquidated its Australian-based operations. The divestiture of this operation resulted in a foreign currency exchange loss of $0.4 million.
15
CRA International, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
15. Restructuring Charges and Subsequent Events (Continued)
Also, on March 14, 2010, the Company committed to a plan to close its Houston, Texas office, restructure select practice areas, and better align staffing levels with revenue. As a result of this plan, the Company is taking steps to reduce consultant headcount by 36 positions and eliminate support staff positions. These actions were designed to reduce costs, increase utilization, and improve the Company's profitability and competitive position.
The Company began these actions and expects them to be completed during the second quarter of fiscal 2010. The Company expects to record a restructuring charge in the approximate range of $4.9 million to $5.5 million in the second quarter of fiscal 2010 related to one-time termination benefits, facility-related charges, asset write-downs and other potential charges. The Company has not finalized the employee separation costs and other costs associated with these actions or the offsetting benefits the Company may have as a result of these actions. Accordingly, the Company will provide an estimate of any additional costs, as well as the total amount or range of amounts expected to be incurred, and an estimate of the associated cash expenditures, when they have been determined.
The restructuring charge that the Company expects to incur in connection with the restructuring is subject to a number of assumptions, and actual results may materially differ. The Company may also incur other material charges not currently contemplated due to events that may occur as a result of, or associated with, the restructuring plan.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Except for historical facts, the statements in this quarterly report are forward- looking statements. Forward-looking statements are merely our current predictions of future events. These statements are inherently uncertain, and actual events could differ materially from our predictions. Important factors that could cause actual events to vary from our predictions include those discussed below under the heading "Risk Factors". We assume no obligation to update our forward-looking statements to reflect new information or developments. We urge readers to review carefully the risk factors described in this quarterly report and in the other documents that we file with the Securities and Exchange Commission, or SEC. You can read these documents at www.sec.gov.
Our principal internet address is www.crai.com. Our website provides a link to a third-party website through which our annual, quarterly, and current reports, and amendments to those reports, are available free of charge. We believe these reports are made available as soon as reasonably practicable after we file them electronically with, or furnish them to, the SEC. We do not maintain or provide any information directly to the third-party website, nor do we check the accuracy of this website.
Our website also includes information about our corporate governance practices. The Investor Relations page of our website provides a link to a web page where you can obtain a copy of our code of ethics applicable to our principal executive officer, principal financial officer, and principal accounting officer.
Economic Conditions
Our business has been affected by the global economic recession, as clients for some of our larger litigation cases requested us to slow down the pace of work, and some of our management consulting clients delayed new projects. We continue to focus on business development and client-facing activities, including recruiting senior-level consultants. However, in order to more closely align our costs and staffing levels with our revenue, additional actions were required. These actions were carefully targeted so as not to jeopardize longer-term growth prospects in both our core and emerging practices. We are taking steps in the second quarter of fiscal 2010 to reduce consultant headcount and eliminate support staff positions, and we completed a series of initiatives in fiscal 2009 and fiscal 2008. These initiatives include reducing our workforce, consolidating, reducing, moving, or closing some of our offices, divesting some of our underperforming practices, and eliminating other expenses based on an evaluation of our current administrative practices and infrastructure. For additional information on these initiatives, refer to Note 15 in our Notes to Condensed Consolidated Financial Statements.
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 accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates in these condensed consolidated financial statements include, but are not limited to, accounts receivable allowances, revenue recognition on fixed price contracts, depreciation of property and equipment, share-based compensation, valuation of acquired intangible assets, impairment of long lived assets, goodwill, accrued and deferred income taxes, valuation allowances on deferred tax assets, accrued bonuses, accrued exit costs, and other accrued expenses. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future.
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Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if our assumptions based on past experience or our other assumptions do not turn out to be substantially accurate.
A summary of the accounting policies that we believe are most critical to understanding and evaluating our financial results is set forth below. This summary should be read in conjunction with our condensed consolidated financial statements and the related notes included in Item 1 of this quarterly report, as well as in our most recently filed annual report on Form 10-K.
Revenue Recognition and Accounts Receivable Allowances. We derive substantially all of our revenues from the performance of professional services. The contracts that we enter into and operate under specify whether the engagement will be billed on a time-and-materials or fixed-price basis. These engagements generally last three to six months, although some of our engagements can be much longer in duration. Each contract must be approved by one of our vice presidents.
We recognize substantially all of our revenues under written service contracts with our clients where the fee is fixed or determinable, as the services are provided, and only in those situations where collection from the client is reasonably assured and sufficient contractual documentation has been obtained. In certain cases we provide services to our clients without sufficient contractual documentation, or fees are tied to performance-based criteria, which require us to defer revenue in accordance with U.S. GAAP. In these cases, where we invoice clients, these amounts are fully reserved until all criteria for recognizing revenue are met.
Most of our revenue is derived from time-and-materials service contracts. Revenues from time-and-materials service contracts are recognized as the services are provided based upon hours worked and contractually agreed-upon hourly rates, as well as a computer services fee based upon hours worked.
Revenues from the majority of our fixed-price engagements are recognized on a proportional performance method based on the ratio of costs incurred, substantially all of which are labor-related, to the total estimated project costs. Project costs are based on the direct salary of the consultants on the engagement plus all direct expenses incurred to complete the engagement that are not reimbursed by the client. The proportional performance method is used since reasonably dependable estimates of the revenues and costs applicable to various stages of a contract can be made, based on historical experience and terms set forth in the contract, and are indicative of the level of benefit provided to our clients. Our fixed-price contracts generally include a termination provision that reduces the agreement to a time-and-materials contract in the event of termination of the contract. Our management maintains contact with project managers to discuss the status of the projects and, for fixed-price engagements, management is updated on the budgeted costs and resources required to complete the project. These budgets are then used to calculate revenue recognition and to estimate the anticipated income or loss on the project. In the past, we have occasionally been required to commit unanticipated additional resources to complete projects, which have resulted in lower than anticipated income or losses on those contracts. We may experience similar situations in the future. Provisions for estimated losses on contracts are made during the period in which such losses become probable and can be reasonably estimated. To date, such losses have not been significant.
Revenues also include reimbursable expenses, which include travel and other out-of-pocket expenses, outside consultants, and other reimbursable expenses. Reimbursable expenses are as follows (in thousands):
| | Twelve Weeks Ended | ||||||
|---|---|---|---|---|---|---|---|
| | February 19, 2010 | February 20, 2009 | |||||
Reimbursable expenses | $ | 8,266 | $ | 8,920 | |||
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Our normal payment terms are 30 days from the invoice date. For the twelve weeks ended February 19, 2010, and February 20, 2009 our average days sales outstanding, or DSOs, were 103 days and 100 days. We calculate DSOs by dividing the sum of our accounts receivable and unbilled services balance, net of deferred revenue, at the end of the quarter by average daily revenues. Average daily revenues are calculated by dividing quarter revenues by the number of days in a quarter. Our project managers and finance personnel monitor payments from our clients and assess any collection issues. We maintain accounts receivable allowances for estimated losses resulting from clients' failure to make required payments. We base our estimates on our historical collection experience, current trends, and credit policy. In determining these estimates, we examine historical write-offs of our receivables and review client accounts to identify any specific customer collection issues. If the financial condition of our customers were to deteriorate or disputes were to arise regarding the services provided, resulting in an impairment of their ability to make payment, additional allowances may be required. A failure to estimate accurately the accounts receivable allowances and ensure that payments are received on a timely basis could have a material adverse effect on our business, financial condition, and results of operations. As of February 19, 2010, and November 28, 2009, $7.1 million and $6.8 million were provided for accounts receivable allowances, respectively.
Share-Based Compensation Expense. Share-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense over the requisite service period of the award. We recognize share-based compensation expense using the straight-line attribution method. We use the Black-Scholes option-pricing model to estimate the fair value of share-based awards. Option valuation models require the input of assumptions, including the expected life of the share-based awards, the expected stock price volatility, the risk-free interest rate, and the expected dividend yield. The expected volatility and expected life are based on our historical experience. The risk-free interest rate is based on U.S. Treasury interest rates whose term is consistent with the expected life of the share-based award. Expected dividend yield was not considered in the option pricing formula since we do not pay dividends and have no current plans to do so in the future. We will update these assumptions if changes are warranted. The forfeiture rate is based upon historical experience. We adjust the estimated forfeiture rate based upon our actual experience. In addition, we have performance based awards that are valued at the fair value of shares as of the grant date and expense is recognized based on the number of shares expected to vest under the terms of the award under which they are granted. The fair value determination requires significant assumptions, including estimating future revenues and profits.
Valuation of Goodwill and Other Intangible Assets. We account for our acquisitions under the purchase method of accounting. Goodwill represents the purchase price of acquired businesses in excess of the fair market value of net assets acquired. Intangible assets consist principally of non-competition agreements, which are amortized on a straight-line basis over the related estimated lives of the agreements (eight to ten years), as well as customer relationships, customer lists, and trademarks, which are generally amortized on a straight-line basis over their remaining useful lives (four to ten years).
The goodwill amount for acquisitions is initially recorded based upon a preliminary estimated purchase price allocation and is subject to change. Any preliminary purchase price allocation is based upon our estimate of fair value, and is finalized as we receive other information relevant to the acquisition.
In accordance with Accounting Standards Codification ("ASC") Topic 350, "Intangibles-Goodwill and Other", goodwill and intangible assets with indefinite lives are not subject to amortization, but are monitored annually for impairment, or more frequently, if there are indicators of impairment. Any impairment would be measured based upon the fair value of the related asset. Under ASC Topic 350, in performing the first step of the goodwill impairment testing and measurement process, we compare our entity-wide estimated fair value to net book value to identify potential impairment. We estimate the
19
entity-wide fair value utilizing our market capitalization, plus an appropriate control premium. We utilize a control premium which considers appropriate industry, market and other pertinent factors, including indications of such premiums from data on recent acquisition transactions. If we determine through the impairment evaluation process that goodwill has been impaired, we would record the impairment charge in our consolidated statement of operations.
We assess the impairment of amortizable intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include the following:
- •
- a significant underperformance relative to expected historical or projected future operating results;
- •
- a significant change in the manner of our use of the acquired asset or the strategy for our overall business;
- •
- a significant negative industry or economic trend; and
- •
- our entity-wide fair value relative to net book value.
If we were to determine that an impairment evaluation is required, we would review the expected future undiscounted cash flows to be generated by the assets. If we determine that the carrying value of intangible assets may not be recoverable, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model.
There were no impairment losses related to goodwill or intangible assets during the twelve weeks ended February 19, 2010. We will continue to closely monitor our market capitalization and in the event that our average stock price subsequently declines and our market capitalization plus control premium declines below net book value and remains below book value for a period we consider to be other-than-temporary, we will perform an evaluation of the carrying value of goodwill and other intangibles.
Accounting for Income Taxes. We record income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Our financial statements contain certain deferred tax assets and liabilities that result from temporary differences between book and tax accounting, as well as net operating loss carryforwards. ASC Topic 740, "Income Taxes," requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our net deferred tax assets. We evaluate the weight of all available evidence to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The decision to record a valuation allowance requires varying degrees of judgment based upon the nature of the item giving rise to the deferred tax asset. As a result of operating losses incurred in certain of our foreign subsidiaries, and uncertainty as to the extent and timing of profitability in future periods, we recorded valuation allowances in certain of these foreign subsidiaries based on the facts and circumstances affecting each subsidiary. Had we not recorded these allowances, we would have reported a lower effective tax rate than was recognized in our statements of
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operations in fiscal 2009 and during the first twelve weeks of fiscal 2010. If the realization of deferred tax assets is considered more likely than not, an adjustment to the net deferred tax assets would increase net income in the period such determination was made. The amount of the deferred tax asset considered realizable is based on significant estimates, and it is possible that changes in these estimates could materially affect our financial condition and results of operations.
Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss, changes to the valuation allowance, changes to federal, state, or foreign tax laws, future expansion into areas with varying country, state, and local income tax rates, deductibility of certain costs, uncertain tax positions, and expenses by jurisdiction, and as a result of acquisitions.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in several different tax jurisdictions. We are periodically reviewed by domestic and foreign tax authorities regarding the amount of taxes due. These reviews include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the exposure associated with various filing positions, we record estimated reserves for probable exposures. Based on our evaluation of current tax positions, we believe we have appropriately accrued for probable exposures. The IRS is currently conducting an examination of fiscal 2007. Audit field work began in late February 2010. Additionally, HM Revenue and Customs is reviewing our UK subsidiary's fiscal 2006 and fiscal 2007 corporate tax returns. No adjustments have been proposed and the outcome of these reviews cannot reasonably be predicted at this time.
Adoption of New Accounting Standards
In May 2008, the FASB issued guidance included in ASC Topic 470-20, "Debt" (formerly FASB Staff Position No. Accounting Principles Board Opinion 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)", which changes the accounting treatment for convertible debt instruments that allow for either mandatory or optional cash settlements. Under ASC Topic 470-20, we are required to recognize non-cash interest expense on our convertible senior subordinated debentures based on the market rate for similar debt instruments without the conversion feature. ASC Topic 470-20 is effective for fiscal years beginning on or after December 15, 2008 and must be applied on a retrospective basis. Upon retroactive adoption of ASC 470-20 in fiscal 2010 during the first quarter of fiscal 2010, we recorded a cumulative after tax adjustment for prior years of $6.4 million, which represented a non-cash decrease in retained earnings as of November 28, 2009. Also, the carrying amount of the convertible debentures was retroactively adjusted to reflect a discount of approximately $12.6 million and a reduction of deferred financing costs by approximately $0.5 million, with offsetting increases in common stock of approximately $6.9 million and deferred tax liability of $5.2 million as of the date of issuance. Under 470-20, in fiscal 2010, we expect to record incremental non-cash interest expense of approximately $1.4 million. The effect of adopting ASC Topic 470-20 is included in the condensed consolidated financial statements.
In December 2007, the FASB issued guidance included in ASC Topic 810, "Consolidation" (formerly Statements of Financial Accounting Standards ("SFAS") No. 160). ASC Topic 810 establishes accounting and reporting standards for noncontrolling interests (previously referred to as "minority interests") in a subsidiary and for the deconsolidation of a subsidiary, to ensure consistency with the requirements of ASC Topic 805, "Business Combinations". ASC Topic 810 states that noncontrolling interests should be classified as a separate component of equity, and establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. We adopted the provisions of ASC Topic 810 during the first quarter of fiscal 2010 and the new presentation and disclosure requirements were applied retrospectively for all periods presented. Upon adoption, certain prior period amounts have been reclassified to conform to the current period financial statement presentation, including the reclassification of $1.6 million to shareholders' equity from non-current liabilities.
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In December 2007, the FASB issued guidance included in ASC Topic 805 (formerly FASB Staff Position SFAS No. 141R-1, which amends and clarifies SFAS No. 141R, "Business Combinations"). The new provisions of ASC Topic 805 require the acquiring entity in a business combination to record all assets acquired and liabilities assumed at their respective acquisition-date fair values if fair value can be reasonably estimated, changes the recognition of assets acquired and liabilities assumed arising from contingencies, changes the recognition and measurement of contingent consideration, and requires the expensing of acquisition-related costs as incurred. If fair value cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with ASC Topic 450, "Contingencies". ASC Topic 805 also requires additional disclosure of information surrounding a business combination, such that users of the entity's financial statements can fully understand the nature and financial impact of the business combination. The new provisions of ASC Topic 805 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, which is our fiscal 2010. An entity may not apply the new provisions of ASC Topic 805 before that date. We adopted the new provisions of ASC Topic 805 during the first quarter of fiscal 2010. For business combinations completed in the future, the application of the new provisions of this topic could have a significant impact on our consolidated statement of operations and financial condition, the magnitude of which will depend on the specific terms and conditions of the transactions.
Results of Operations—For the Twelve Weeks Ended February 19, 2010 and February 20, 2009
The following table provides operating information as a percentage of revenues for the periods indicated:
| | Twelve Weeks Ended | ||||||
|---|---|---|---|---|---|---|---|
| | February 19, 2010 | February 20, 2009 | |||||
Revenues | 100.0 | % | 100.0 | % | |||
Costs of services | 68.7 | 65.4 | |||||
Gross profit | 31.3 | 34.6 | |||||
Selling, general and administrative expenses | 26.8 | 26.2 | |||||
Depreciation and amortization | 2.1 | 2.9 | |||||
Income from operations | 2.4 | 5.5 | |||||
Interest income | 0.1 | 0.2 | |||||
Interest expense | (1.5 | ) | (1.6 | ) | |||
Other income (expense) | (0.1 | ) | (0.1 | ) | |||
Income before provision for income taxes | 0.9 | 4.0 | |||||
Provision for income taxes | (0.7 | ) | (3.5 | ) | |||
Net income | 0.2 | 0.5 | |||||
Net loss attributable to noncontrolling interest, net of tax | 0.3 | 0.3 | |||||
Net income attributable to CRA International, Inc. | 0.5 | % | 0.8 | % | |||
Results of Operations—Twelve Weeks Ended February 19, 2010, Compared to Twelve Weeks Ended February 20, 2009
Revenues. Revenues decreased $7.0 million, or 10.6%, to $58.8 million for the first quarter of fiscal 2010 from $65.8 million for the first quarter of fiscal 2009. Our revenue decline was primarily the result of a decrease in market demand and the global economic recession. Another factor contributing to our revenue decline, to a lesser extent, was the decrease in client reimbursable expenses. Client
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reimbursable expenses are pass-through expenses that carry little to no margin. These decreases in revenue were partially offset by an increase in revenue due to revenue generated by our acquisition of substantially all of the assets of Marakon Associates during the third quarter of fiscal 2009, increased billing rates for our employee consultants, which went into effect during the first quarter of fiscal 2010, and an increase in the reported amount of our foreign currency denominated revenue in the first quarter of fiscal 2010 due to the weakening of the U.S. dollar relative to the British pound and other foreign currencies.
The total number of employee consultants decreased to 588 as of the end of the first quarter of fiscal 2010 from 595 as of the end of the first quarter of fiscal 2009. Utilization decreased to 60% for the first quarter of fiscal 2010 from 68% for the first quarter of fiscal 2009. As a result of the reduced revenue and utilization, on March 14, 2010, we committed to a plan to close our Houston office, restructure selected practice areas, and better align staffing levels with our revenue. As a result of this plan, we are taking steps to reduce consultant headcount by 36 positions and eliminate support staff positions. These actions were designed to reduce costs, increase utilization, and improve our profitability and competitive position.
In the first quarter of fiscal 2010, nearly all of our practices in both our litigation, regulatory, and financial consulting and management consulting areas experienced revenue declines compared to the first quarter of fiscal 2009. Clients have been reluctant to spend, thus lengthening the time to close new engagements, and this has impacted all areas of our business. In the management consulting practices, projects completed in our fourth quarter of fiscal 2009 were not immediately replaced in the first quarter of fiscal 2010. In the litigation, regulatory, and financial consulting practices, work in our current pipeline related to the financial meltdown ramped up slowly and some practices experienced delays in existing projects proceeding through the court system and regulatory agencies. Revenue generated by our acquisition of substantially all of the assets of Marakon Associates partially offset our overall revenue decline.
Overall, revenues outside of the U.S. represented approximately 26% of total revenues for the first quarter of fiscal 2010, compared with 21% of total revenues for the first quarter of fiscal 2009, which is due primarily to a higher revenue decline in the U.S. Although revenue declined in all regions, the revenue decline outside of the U.S. was partially offset by an increase in the reported amount of our foreign currency denominated revenue in the first quarter of fiscal 2010 because of the weakening of the U.S. dollar relative to the British pound, and a greater contribution in revenue related to the acquisition of substantially all of the assets of Marakon Associates. Revenues derived from fixed-price engagements increased to 15.1% of total revenues for the first quarter of fiscal 2010 compared with 9.9% for the first quarter of fiscal 2009. The increase in revenues from fixed-price engagements is due primarily to the acquisition of substantially all of the assets of Marakon Associates.
Costs of Services. Costs of services decreased $2.6 million, or 6.1%, to $40.5 million for the first quarter of fiscal 2010 from $43.1 million for the first quarter of fiscal 2009. The decrease in costs of services is mainly due to a decrease in compensation expense for our employee consultants of $1.3 million, or 3.9%. Included in the decrease in compensation expenses are $0.5 million of employee separation and other compensation costs related to the workforce reduction completed during the first quarter of fiscal 2009. In addition, client reimbursable expenses decreased by $0.7 million, or 7.3%, to $8.3 million for the first quarter of fiscal 2010 from $8.9 million for the first quarter of fiscal 2009. Partially offsetting these decreases are increases in costs of services as a result of acquiring substantially all of the assets of Marakon Associates and the weakening of the U.S dollar relative to the British pound and other foreign currencies. As a percentage of revenues, costs of services increased to 68.7% for the first quarter of fiscal 2010 from 65.4% for the first quarter of fiscal 2009. The increase in costs of services as a percentage of revenue is due to an increase in compensation expense as a percentage of revenue of 2.8% and client reimbursable expenses as a percentage of revenue of 0.5%, which was
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primarily a result of lower revenue in the first quarter of fiscal 2010 compared with the first quarter of fiscal 2009.
As mentioned previously, on March 14, 2010, we committed to a plan to close our Houston, Texas office, restructure select practice areas, and better align staffing levels with revenue. As a result of this plan, we are taking steps to reduce consultant headcount by 36 positions and eliminate support staff positions. These actions were designed to reduce costs, increase utilization, and improve our profitability and competitive position. We anticipate that these restructuring activities will result in a charge during the second quarter of fiscal 2010 of approximately $4.9 million to $5.5 million in cost of services and selling, general, and administrative expenses.
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses decreased by $1.5 million, or 8.5%, to $15.8 million for the first quarter of fiscal 2010 from $17.3 million for the first quarter of fiscal 2009. The decrease in selling, general, and administrative expenses is largely due to a decrease in compensation expense due to a reduction in support staff and a decrease in commissions to non-employee experts. As a percentage of revenues, selling, general, and administrative expenses increased slightly to 26.8% for the first quarter of fiscal 2010 from 26.2% for the first quarter of fiscal 2009, which was primarily a result of lower revenue in the first quarter of fiscal 2010 compared with the first quarter of fiscal 2009.
Depreciation and Amortization. Depreciation and amortization decreased by $0.7 million, or 34.2%, to $1.3 million for the first quarter of fiscal 2010 from $1.9 million for the first quarter of fiscal 2009. The decrease is largely due to a decrease in leasehold improvements and computer equipment due to office closures and reduced headcount.
Interest Income. Interest income decreased by $78,000 to $79,000 for the first quarter of fiscal 2010 from $157,000 for the first quarter of fiscal 2009. This decrease was due primarily to reduced cash balances.
Interest Expense. Interest expense decreased by $182,000 to $870,000 for the first quarter of fiscal 2010 from $1.1 million for the first quarter of fiscal 2009. Interest expense primarily represents interest incurred on our 2.875% convertible debt, the amortization of debt issuance costs, and the amortization of the discount recorded in connection with our adoption of ASC Topic 470-20. The decrease was primarily due to the lower principle balance outstanding on our convertible debt in the first quarter of fiscal 2010 compared with the first quarter of fiscal 2009.
Other Income (Expense). Other income (expense) decreased by $55,000 to expense of $14,000 for the first quarter of fiscal 2010 from expense of $69,000 for the first quarter of fiscal 2009. Other income (expense) consists primarily of foreign currency exchange transaction gains and losses. The loss in the first quarter of fiscal 2009 was principally the result of recording a cumulative foreign currency exchange loss of $0.4 million related to the liquidation of our Australian-based operations. We continue to manage our foreign currency exchange exposure through frequent settling of intercompany account balances and by self-hedging movements in exchange rates between the value of the dollar and foreign currencies and the Euro and the British pound.
Provision for Income Taxes. The provision for income taxes was $0.4 million for the first quarter of fiscal 2010, a decrease of $1.8 million from the first quarter of fiscal 2009. Our effective income tax rate decreased to 81.5% for the first quarter of fiscal 2010 from 86.7% for the first quarter of fiscal 2009. The effective tax rate in both periods was higher than the expected statutory rate primarily due to losses in foreign locations that provided no tax benefit. In addition, the effective rate in the first quarter of fiscal 2009 was unfavorably impacted by a non-recurring discrete item relating to the liquidation of our Australian-based operations.
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Net Income. Net income decreased by $247,000 to $99,000 for the first quarter of fiscal 2010 from $346,000 for the first quarter of fiscal 2009. Net income includes a net loss for NeuCo of $0.3 million in the first quarter of fiscal 2010 compared with a net loss of $0.4 million in the first quarter of fiscal 2009. The decrease in net income is due primarily to a decrease in revenue and utilization.
Net loss attributable to noncontrolling interest, net of tax. Since October of fiscal 2008, our ownership interest in NeuCo constitutes control under GAAP. As a result, NeuCo's financial results are consolidated with ours and allocations of the noncontrolling interest's share of NeuCo's net income result in deductions to our net income, while allocations of the noncontrolling interest's share of NeuCo's net loss result in additions to our net income. The results of operations of NeuCo allocable to its other owners was a net loss of $167,000 for the first quarter of fiscal 2010 and $188,000 in the first quarter of fiscal 2009.
Net income attributable to CRA International, Inc. Net income decreased by $268,000 to $266,000 for the first quarter of fiscal 2010 from $534,000 for the first quarter of fiscal 2009. Diluted net income per share decreased to $0.02 per share for the first quarter of fiscal 2010 from $0.05 per share for the first quarter of fiscal 2009. Diluted weighted average shares outstanding increased by approximately 178,000 shares to approximately 10,835,000 shares for the first quarter of fiscal 2010 from approximately 10,657,000 shares for the first quarter of fiscal 2009. The increase in diluted weighted average shares outstanding is primarily due to an increase in common stock equivalents from employee stock option and restricted share awards, and an increase in common stock due to restricted shares that have vested and options that have been exercised since February 20, 2009.
Liquidity and Capital Resources
General. In the twelve weeks ended February 19, 2010, cash and cash equivalents decreased by $2.7 million. We completed the quarter with cash and cash equivalents of $80.1 million, short term investments of $33.2 million, and working capital (defined as current assets less current liabilities) of $150.8 million. As of February 19, 2010, approximately $25 million for fiscal 2009 performance bonuses remained payable. We anticipate that the majority of these bonuses will be paid during the second quarter of fiscal 2010.
We believe that current cash balances, cash generated from operations, and amounts available under our bank line of credit will be sufficient to meet our anticipated working capital, capital expenditure, and contingent consideration payment requirements for at least the next 12 months.
Sources and Uses of Cash in the twelve weeks ended February 19, 2010. During the first twelve weeks of fiscal 2010, net cash provided by operations was $8.4 million. The sources of cash in operations included net income of $0.1 million, which included depreciation and amortization expense of $1.3 million and share-based compensation expense of $1.7 million, as well as a decrease in accounts receivable of $10.2 million. Accounts receivable decreased primarily due to a decrease in revenue. The sources of cash in operations were offset by uses of cash including decreases in deferred rent of $1.2 million and accounts payable, accrued expenses, and other liabilities of $4.9 million. The payment of a portion of fiscal 2009 bonuses totaling approximately $5.0 million are included in the decrease in accounts payable, accrued expenses, and other liabilities during the twelve weeks ended February 19, 2010.
We used $10.8 million of net cash from investing activities for the first twelve weeks of fiscal 2010, which included uses of cash of $0.6 million for capital expenditures, $0.7 million of net acquisition consideration payments, and $33.2 million to purchase short-term investments to achieve higher returns on our excess cash. These uses of cash were partially offset by $23.7 million received for the sale of short-term investments.
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We used $0.3 million of net cash from financing activities for the first twelve weeks of fiscal 2010. Cash used in financing activities was primarily used to redeem $0.5 million in vested employee restricted shares for tax withholdings, offset partially by $0.2 million received upon the exercise of stock options.
Private Placement of Convertible Debt. In 2004, we completed a private placement of $90.0 million of 2.875% convertible senior subordinated debentures due in 2034. The debentures are our direct, unsecured senior subordinated obligations and rank junior in right of payment to our existing bank revolving line of credit and any future secured indebtedness that we may designate as senior indebtedness. Contractual interest of approximately $0.9 million, is payable semi-annually on June 15 and December 15.
As a result of our election on December 14, 2004, we must settle the conversion of the debentures, as follows: (i) $1,000 in cash per $1,000 principal amount of debentures converted; and (ii) in cash or shares of our common stock (at our further election, except for cash in lieu of fractional shares), any conversion obligation that exceeds the principal amount of the debentures converted.
Pursuant to the terms of the indenture governing the debentures, since the closing stock price did not equal or exceed the $50 per share contingent conversion trigger price for 20 out of the 30 consecutive trading days ended on February 19, 2010, the market price conversion trigger was not satisfied and holders of the debentures are not able to exercise their right to convert the bonds as of the first trading day of the second quarter of fiscal 2010. This test is repeated each fiscal quarter. To date, no conversions have occurred. During fiscal 2009 and fiscal 2008, we repurchased $27.5 million of our convertible bonds, on the open market, at a discount. We believe that in the event the contingent conversion trigger price is met, it is unlikely that a significant percentage of bondholders will exercise their right to convert because the debentures have traded at a premium over their conversion value. Since the holders of the debentures are not able to exercise their right to convert the bonds as of February 19, 2010, we have classified the $60.6 million convertible debt as long-term debt as of February 19, 2010, in the accompanying condensed consolidated balance sheet. Our revolving line of credit to borrow up to $60.0 million expires on April 30, 2012 and it is our intention to renew or replace the revolving line of credit, as desirable and available, which would allow us to continue to classify a portion of our convertible debentures as long-term debt, rather than short-term in future periods. In addition, the revolving line of credit gives us additional flexibility to meet any unforeseen financial requirements.
As early as June 15, 2011 or upon certain specified fundamental changes, we may be required to repurchase all or any portion of the debentures, at the option of each holder, which, in the event of a fundamental change involving a change of control of our firm, may include the payment of a make-whole premium.
Borrowings under the Revolving Line of Credit. We are party to a senior loan agreement with our bank for a $60.0 million revolving line of credit with a maturity date of April 30, 2012. Subject to the terms of the agreement, we may use borrowings under this revolving line of credit for acquisition financing, working capital, general corporate purposes, letters of credit, and foreign exchanges contracts. The available revolving line of credit is reduced, as necessary, to account for certain outstanding letters of credit. The $60.0 million credit facility allows us to mitigate the potential liquidity risk, and to provide funding if required, in the event of conversion by the debenture holders. Funds available under the facility currently allow us to continue to classify a portion of our convertible debentures as long-term debt, rather than short-term, even if the convertible debentures have a right to convert in the short-term because the conversion trigger price discussed above is met, so long as the revolving line of credit is, at that time, classified as long-term debt. The revolving line of credit also gives us additional flexibility to meet any unforeseen financial requirements. The amounts available under our bank revolving line of credit are constrained by various financial covenants and reduced by
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certain outstanding letters of credit. As of February 19, 2010, there were no amounts outstanding under this revolving line of credit and $4.6 million in letters of credit were outstanding.
Borrowings under our credit facility bear interest, at LIBOR plus an applicable margin. Applicable margins range from 2.0% to 3.5%, depending on the ratio of our consolidated total debt to consolidated earnings before interest, taxes, depreciation and amortization, or EBITDA, for the preceding four fiscal quarters, subject to various adjustments stated in the senior loan agreement. These margins are adjusted both quarterly and each time we borrow under the credit facility. Interest is payable monthly. A commitment fee of 0.25% is payable on the unused portion of the credit facility. Borrowings under the credit facility are secured by 100% of the stock of certain of our U.S. subsidiaries and 65% of the stock of certain of our foreign subsidiaries, which represents approximately $71.4 million in net assets as of February 19, 2010.
Debt Restrictions. Under our senior loan agreement, we must comply with various financial and non-financial covenants. The financial covenants require us to maintain a minimum consolidated working capital of $25.0 million and require us to comply with a consolidated total debt to EBITDA ratio of not more than 3.5 to 1.0 and a consolidated senior debt to EBITDA ratio of not more than 2.0 to 1.0. Compliance with these financial covenants is tested on a fiscal quarterly basis. In March 2005, we amended the definition of "current liabilities" included in the working capital covenant of the senior credit agreement to exclude any convertible subordinated debt for which we have not been notified of the intention to convert. The non-financial covenants of the senior credit agreement place certain restrictions on our ability to incur additional indebtedness, engage in acquisitions or dispositions, and enter into business combinations. Any indebtedness outstanding under the senior 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. As of February 19, 2010, we were in compliance with our covenants under the senior credit agreement.
Other Matters. 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, or borrowings under our revolving credit facility, or we may pursue other forms of financing. Our ability to secure short-term and long-term debt or equity financing in the future, including our ability to refinance our current senior loan agreement, will depend on several factors, including our future profitability, the levels of our debt and equity, restrictions under our existing revolving line of credit with our bank, and the overall credit and equity market environments.
In June 2007, we announced that our Board of Directors authorized a share repurchase program of up to a total of 1,500,000 shares of our common stock. We will finance the repurchase program with available cash and cash from future operations. We may repurchase shares in open market purchases or in privately negotiated transactions in accordance with applicable insider trading and other securities laws and regulations. To date, we have repurchased 1,284,282 shares under this plan for approximately $55.3 million. We did not repurchase shares under this program during the first quarter of fiscal 2010, but expect to continue to repurchase shares in the future.
In addition, we may from time to time seek to retire or repurchase portions of our 2.875% convertible debentures through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Contingencies. In connection with an acquisition we completed in fiscal 2009, we agreed to pay incentive performance awards, if specific performance targets are met in fiscal 2010 through fiscal 2012.
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In addition, in connection with an acquisition completed during fiscal 2006, we agreed to pay additional consideration, contingent upon the achievement of specific performance targets. We believe that we will have sufficient funds to satisfy any obligations related to the incentive performance awards and contingent consideration. We expect to fund these payments, if any, from existing cash resources, cash generated from operations, or financing transactions.
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.
Factors Affecting Future Performance
Part II, Item 1A of this quarterly report sets forth risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this quarterly report. If any of these risks, or any risks not presently known to us or that we currently believe are not significant, develops into an actual event, then our business, financial condition, and results of operations could be adversely affected.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Risk
The majority of our operations are based in the U.S., and accordingly, the majority of our transactions are denominated in U.S. dollars. However, we have foreign-based operations where transactions are denominated in foreign currencies and are subject to market risk with respect to fluctuations in the relative value of foreign currencies. Our primary foreign currency exposures relate to our short-term intercompany balances with our foreign subsidiaries and accounts receivable and cash valued in the United Kingdom in U.S. dollars. Our primary foreign subsidiaries have functional currencies denominated in the British pound and Euro, and foreign denominated assets and liabilities are remeasured each reporting period with any exchange gains and losses recorded in our consolidated statements of operations. We continue to manage our foreign currency exchange exposure through frequent settling of intercompany account balances and by self-hedging movements in exchange rates between the value of the dollar and foreign currencies and the Euro and the British pound. Holding all other variables constant, fluctuations in foreign exchange rates may impact reported revenues and expenses significantly, based on currency exposures at February 19, 2010. A hypothetical 10% movement in foreign exchange rates would have affected our income from operations for the twelve weeks ended February 19, 2010 by approximately $0.5 million. However, actual gains and losses in the future could differ materially from this analysis based on the timing and amount of both foreign currency exchange rate movements and our actual exposure.
From time to time, we may use derivative instruments to manage the risk of exchange rate fluctuations. However, at February 19, 2010, we had no outstanding derivative instruments. We do not use derivative instruments for trading or speculative purposes.
Interest Rate Risk
We maintain an investment portfolio consisting mainly of U.S. government obligations, funds holding only U.S. and Canadian government obligations, and corporate obligations with maturities of less than a year. These held-to-maturity securities are subject to interest rate risk. However, a hypothetical change in the interest rate of 10% would not have a material impact to the fair values of these securities at February 19, 2010 primarily due to their short maturity.
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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. Based upon that evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we record, process, summarize and report the information we must disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended, within the time periods specified in the SEC's rules and forms.
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 our Chief Financial Officer, we have determined that, during the first quarter of fiscal 2010, there were no changes in our internal control over financial reporting that have affected, or are reasonably likely to affect, materially our internal control over financial reporting.
Important Considerations
The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to various inherent limitations, including cost limitations, 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 of 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.
None.
Our operations are subject to a number of risks. You should carefully read and consider the following risk factors, together with all other information in this report, in evaluating our business. 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. If that happens, the market price of our common stock could decline, and you may lose all or part of your investment.
Continuing deterioration of global economic conditions, global market and credit conditions, and regulatory and legislative changes affecting our clients, practice areas, competitors, or staff could have an impact on our business
Overall global economic conditions and global market and credit conditions in the industries we service have negatively impacted the market for our services and could continue to do so. A number of factors outside of our control include the availability of credit, the costs and terms of borrowing,
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merger and acquisition activity, and general economic factors and business conditions. For example, the current global economic recession has resulted in, and may continue to result in, reduced merger and acquisition activity levels.
Similarly, many of our clients are in highly regulated industries. Regulatory and legislative changes in these industries could also impact the market for our service offerings and could render our current service offerings obsolete, reduce the demand for our services, or impact the competition for consulting and expert services. For example, potential changes in the patent laws could have a significant impact on our intellectual property practice. We are not able to predict the positive or negative effects that future events or changes to the U.S. or international business environment could have on our operations.
We depend upon key employees to generate revenue
Our business consists primarily of the delivery of professional services, and accordingly, our success depends heavily on the efforts, abilities, business generation capabilities, and project execution capabilities of our employee consultants. In particular, our employee consultants' personal relationships with our clients are a critical element in obtaining and maintaining client engagements. If we lose the services of any employee consultant or group of employee consultants, or if our employee consultants fail to generate business or otherwise fail to perform effectively, that loss or failure could adversely affect our revenues and results of operations. Our employee consultants generated engagements that accounted for approximately 83% and 82% of our revenues in fiscal 2009 and fiscal 2008, respectively. Our top five employee consultants generated approximately 11% of our revenues in fiscal 2009 and fiscal 2008, respectively.
We do not have non-competition agreements with the majority of our employee consultants, and they can terminate their relationships with us at will and without notice. The non-competition and non-solicitation agreements that we have with some of our employee consultants offer us only limited protection and may not be enforceable in every jurisdiction. In the event that employees leave, some clients may decide that they prefer to continue working with the employee rather than with us. In the event an employee departs and acts in a way that we believe violates their non-competition or non-solicitation agreement, we will consider any legal remedies we may have against such person on a case-by-case basis. We may decide that preserving cooperation and a professional relationship with the former employee or client, or other concerns, outweigh the benefits of any possible legal recovery.
Competition from other economic, litigation support, and management consulting firms could hurt our business
The market for economic, litigation support, and management consulting services is intensely competitive, highly fragmented, and subject to rapid change. We may be unable to compete successfully with our existing competitors or with any new competitors. In general, there are few barriers to entry into our markets, and we expect to face additional competition from new entrants into the economic and management consulting industries. In the litigation, regulatory, and financial consulting markets, we compete primarily with other economic and financial consulting firms and individual academics. In the management consulting market, we compete primarily with other business and management consulting firms, specialized or industry-specific consulting firms, the consulting practices of large accounting firms, and the internal professional resources of existing and potential clients. Many of our competitors have national or international reputations as well as significantly greater personnel, financial, managerial, technical, and marketing resources than we do, which could enhance their ability to respond more quickly to technological changes, finance acquisitions, and fund internal growth. Some of our competitors also have a significantly broader geographic presence and resources than we do.
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Our international operations create special risks
Our international operations carry special financial and business risks, including:
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- greater difficulties in managing and staffing foreign operations;
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- difficulties in maintaining world-wide utilization levels;
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- lower margins;
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- currency fluctuations that adversely affect our financial position and operating results;
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- unexpected changes in trading policies, regulatory requirements, tariffs, and other barriers;
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- different practices in collecting accounts receivable;
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- increased selling, general, and administrative expenses associated with managing a larger and more global organization;
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- longer sales cycles;
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- restrictions on the repatriation of earnings;
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- potentially adverse tax consequences, such as trapped foreign losses;
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- the impact of differences in the governmental, legal and regulatory environment in foreign jurisdictions, as well as U.S. laws and regulations related to our foreign operations;
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- less stable political and economic environments; and
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- civil disturbances or other catastrophic events that reduce business activity.
We conduct a portion of our business in the Middle East. At times, the ongoing turmoil in the region could interrupt our business operations in that region and slow the flow of new opportunities and proposals, which can ultimately affect our revenues and results of operations.
If our international revenues increase relative to our total revenues, these factors could have a more pronounced effect on our operating results.
Maintaining our professional reputation is crucial to our future success
Our ability to secure new engagements and hire qualified consultants as employees depends heavily on our overall reputation as well as the individual reputations of our employee consultants and principal non-employee experts. Because we obtain a majority of our new engagements from existing clients, any client that is dissatisfied with our performance on a single matter could seriously impair our ability to secure new engagements. Given the frequently high-profile nature of the matters on which we work, including work before and on behalf of government agencies, any factor that diminishes our reputation or the reputations of any of our employee consultants or non-employee experts could make it substantially more difficult for us to compete successfully for both new engagements and qualified consultants.
Our business could suffer if we are unable to hire and retain additional qualified consultants as employees
Our business continually requires us to hire highly qualified, highly educated consultants as employees. Our failure to recruit and retain a significant number of qualified employee consultants could limit our ability to accept or complete engagements and adversely affect our revenues and results of operations. Relatively few potential employees meet our hiring criteria, and we face significant competition for these employees from our direct competitors, academic institutions, government agencies, research firms, investment banking firms, and other enterprises. Many of these competing employers are able to offer potential employees significantly greater compensation and benefits or
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more attractive lifestyle choices, career paths, or geographic locations than we can. Competition for these employee consultants has increased our labor costs, and a continuation of this trend could adversely affect our margins and results of operations.
In addition, we utilize loans with some of our employees and non-employee experts, other than our executive officers, as a way to attract and retain them. A portion of these loans are collateralized. Defaults under these loans could have a material adverse affect on our consolidated statements of income, financial condition and liquidity.
Our failure to execute our business strategy or manage future growth successfully could adversely affect our revenues and results of operations
Any failure on our part to execute our business strategy or manage future growth successfully could adversely affect our revenues and results of operations. In the future, we could open offices in new geographic areas, including foreign locations, and expand our employee base as a result of internal growth and acquisitions. Opening and managing new offices often requires extensive management supervision and increases our overall selling, general, and administrative expenses. Expansion creates new and increased management, consulting, and training responsibilities for our employee consultants. Expansion also increases the demands on our internal systems, procedures, and controls, and on our managerial, administrative, financial, marketing, and other resources. We depend heavily upon the managerial, operational, and administrative skills of our executive officers to manage our expansion and business strategy. New responsibilities and demands may adversely affect the overall quality of our work.
We depend on our non-employee experts
We depend on our relationships with our exclusive non-employee experts. In fiscal 2009 and fiscal 2008, five of our exclusive non-employee experts generated engagements that accounted for approximately 9% and 11% of our revenues in those years, respectively. We believe that these experts are highly regarded in their fields and that each offers a combination of knowledge, experience, and expertise that would be very difficult to replace. We also believe that we have been able to secure some engagements and attract consultants in part because we could offer the services of these experts. Most of these experts can limit their relationships with us at any time for any reason. These reasons could include affiliations with universities with policies that prohibit accepting specified engagements, the pursuit of other interests, and retirement.
As of November 28, 2009, we had restrictive covenant contracts, which in some cases include non-competition agreements, with 43 of our non-employee experts. The limitation or termination of any of their relationships with us, or competition from any of them after these agreements expire, could harm our reputation, reduce our business opportunities and adversely affect our revenues and results of operations. The non-competition agreements that we have with some of our non-employee experts offer us only limited protection and may not be enforceable in every jurisdiction. In the event that non-employee experts leave, such clients may decide that they prefer to continue working with the non-employee expert rather than with us. In the event a non-employee expert departs and acts in a way that we believe violates their non-competition agreement, we will consider any legal remedies we may have against such person on a case-by-case basis. We may decide that preserving cooperation and a professional relationship with the former non-employee expert or client, or other concerns, outweigh the benefits of any possible legal recovery.
To meet our long-term growth targets, we need to establish ongoing relationships with additional non-employee experts who have reputations as leading experts in their fields. We may be unable to establish relationships with any additional non-employee experts. In addition, any relationship that we
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do establish may not help us meet our objectives or generate the revenues or earnings that we anticipate.
We depend on our antitrust and mergers and acquisitions consulting business
We derive a significant amount of our revenues from engagements related to antitrust and mergers and acquisitions activities. Any substantial reduction in the number or size of our engagements in these areas could adversely affect our revenues and results of operations. Adverse changes in general economic conditions, particularly conditions influencing the merger and acquisition activity of larger companies, could adversely affect engagements in which we assist clients in proceedings before the U.S. Department of Justice, the U.S. Federal Trade Commission, and various foreign antitrust authorities. For example, the current global economic recession has resulted in, and may continue to result in, reduced merger and acquisition activity levels. These reductions in activity level would adversely affect our revenues and results of operations.
We derive our revenues from a limited number of large engagements
We derive a portion of our revenues from a limited number of large engagements. If we do not obtain a significant number of new large engagements each year, our business, financial condition, and results of operations could suffer. Our ten largest engagements accounted for approximately 11% and 12% of our revenues in fiscal 2009 and fiscal 2008, respectively. Our ten largest clients accounted for approximately 14% and 18% of our revenues in fiscal 2009 and fiscal 2008, respectively. No single client accounted for more than 5% of our revenues in fiscal 2009 and fiscal 2008. In general, the volume of work we perform for any particular client varies from year to year, and due to the specific engagement nature of our practice, a major client in one year may not hire us in the following year.
Clients can terminate engagements with us at any time
Many of our engagements depend upon disputes, proceedings, or transactions that involve our clients. Our clients may decide at any time to seek to resolve the dispute or proceeding, abandon the transaction, or file for bankruptcy. Our engagements can therefore terminate suddenly and without advance notice to us. If an engagement is terminated unexpectedly, our employee consultants working on the engagement could be underutilized until we assign them to other projects. In addition, because much of our work is project-based rather than recurring in nature, our consultants' utilization depends on our ability to secure additional engagements on a continual basis. Accordingly, the termination or significant reduction in the scope of a single large engagement could reduce our utilization and have an immediate adverse impact on our revenues and results of operations.
Acquisitions may disrupt our operations or adversely affect our results
We regularly evaluate opportunities to acquire other businesses. The expenses we incur evaluating and pursuing acquisitions could adversely affect our results of operations. If we acquire a business, we may be unable to manage it profitably or successfully integrate its operations with our own. Moreover, we may be unable to realize the financial, operational, and other benefits we anticipate from these acquisitions or any other acquisition. Many potential acquisition targets do not meet our criteria, and for those that do, we face significant competition for these acquisitions from our direct competitors, private equity funds, and other enterprises. Competition for future acquisition opportunities in our markets could increase the price we pay for businesses we acquire and could reduce the number of potential acquisition targets. Further, acquisitions may involve a number of special financial and business risks, such as:
- •
- diversion of our management's time, attention, and resources;
- •
- decreased utilization during the integration process;
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- •
- loss of key acquired personnel;
- •
- increased costs to improve or coordinate managerial, operational, financial, and administrative systems including compliance with the Sarbanes-Oxley Act of 2002;
- •
- dilutive issuances of equity securities, including convertible debt securities;
- •
- the assumption of legal liabilities;
- •
- amortization of acquired intangible assets;
- •
- potential write-offs related to the impairment of goodwill, including if our enterprise value declines below certain levels;
- •
- difficulties in integrating diverse corporate cultures; and
- •
- additional conflicts of interests.
Our entry into new lines of business could adversely affect our results of operations
If we attempt to develop new practice areas or lines of business outside our core economic, financial, and management consulting services, those efforts could harm our results of operations. Our efforts in new practice areas or new lines of business involve inherent risks, including risks associated with inexperience and competition from mature participants in the markets we enter. Our inexperience in these new practice areas or lines of business may result in costly decisions that could harm our business.
Fluctuations in the types of service contracts we enter into may adversely impact revenue and results of operations
We derive a portion of our revenues from fixed-price contracts. In fiscal 2009 and fiscal 2008, we derived 12.4%, and 8.3% of our revenues from fixed-price engagements, respectively. These contracts are more common in our management consulting practice, and would likely grow in number with any expansion of that practice. Fluctuations in our mix between time-and-material or fixed-price contracts or arrangements with fees tied to performance-based criteria, may result in fluctuations of revenue and results of operations. In addition, if we fail to estimate accurately the resources required for a fixed-price project or fail to satisfy our contractual obligations in a manner consistent with the project budget, we might generate a smaller profit or incur a loss on the project. On occasion, we have had to commit unanticipated additional resources to complete projects, and we may have to take similar action in the future, which could adversely affect our revenues and results of operations.
Our engagements may result in professional liability and we may be subject to other litigation, claims or assessments
Our services typically involve difficult analytical assignments and carry risks of professional and other liability. Many of our engagements involve matters that could have a severe impact on the client's business, cause the client to lose significant amounts of money, or prevent the client from pursuing desirable business opportunities. Accordingly, if a client is dissatisfied with our performance, the client could threaten or bring litigation in order to recover damages or to contest its obligation to pay our fees. Litigation alleging that we performed negligently, disclosed client confidential information, or otherwise breached our obligations to the client could expose us to significant liabilities to our clients and other third parties and tarnish our reputation.
Despite our efforts to prevent litigation, from time to time we are party to various lawsuits, claims, or assessments in the ordinary course of business. Disputes may arise, for example, from business acquisitions, employment issues, regulatory actions, and other business transactions. The costs and outcome of any lawsuits or claims could have a material adverse effect on us.
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Potential conflicts of interests may preclude us from accepting some engagements
We provide our services primarily in connection with significant or complex transactions, disputes, or other matters that are usually adversarial or that involve sensitive client information. Our engagement by a client may preclude us from accepting engagements with the client's competitors or adversaries because of conflicts between their business interests or positions on disputed issues or other reasons. Accordingly, the nature of our business limits the number of both potential clients and potential engagements. Moreover, in many industries in which we provide consulting services, such as in the telecommunications industry, there has been a continuing trend toward business consolidations and strategic alliances. These consolidations and alliances reduce the number of potential clients for our services and increase the chances that we will be unable to continue some of our ongoing engagements or accept new engagements as a result of conflicts of interests.
Our clients may be unable or unwilling to pay us for our services
Our clients include some companies that may from time to time encounter financial difficulties, particularly during a downward trend in the economy or may dispute the services we provide. If a client's financial difficulties become severe or a dispute arises, the client may be unwilling or unable to pay our invoices in the ordinary course of business, which could adversely affect collections of both our accounts receivable and unbilled services. On occasion, some of our clients have entered bankruptcy, which has prevented us from collecting amounts owed to us. The bankruptcy of a client with a substantial account receivable could have a material adverse effect on our financial condition and results of operations. A small number of clients who have paid sizable invoices later declared bankruptcy, and a court determination that we were not properly entitled to that payment may require repayment of some or all of the amount we received, which could adversely affect our financial condition and results of operations.
We may need to take material write-offs for the impairment of goodwill and other intangible assets if our market capitalization declines
As further described in Note 8 of our Notes to Condensed Consolidated Financial Statements, goodwill and intangible assets with indefinite lives are monitored annually for impairment, or more frequently, if there are indicators of impairment. In performing the first step of the goodwill impairment testing and measurement process, we compare our entity-wide estimated fair value to net book value to identify potential impairment. We estimate the entity-wide fair value utilizing our market capitalization, plus an appropriate control premium. We have utilized a control premium which considers appropriate industry, market and other pertinent factors, including indications of such premiums from data on recent acquisition transactions. If we determine through the impairment evaluation process that goodwill has been impaired, we would record the impairment charge in our consolidated statement of operations.
There were no impairment losses related to goodwill or intangible assets during fiscal 2009. Our entity-wide fair value currently exceeds net book value, and therefore, there has not been an indication of impairment. However, at various points during fiscal 2009 and fiscal 2010, our stock price declined from previous levels. We will continue to closely monitor our market capitalization and in the event that our average stock price subsequently declines and our market capitalization plus control premium declines below net book value and remains below book value for a period we consider to be other-than-temporary, we will perform an evaluation of the carrying value of goodwill and other intangibles.
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Fluctuations in our quarterly revenues and results of operations could depress the market price of our common stock
We may experience significant fluctuations in our revenues and results of operations from one quarter to the next. If our revenues or net income in a quarter fall below the expectations of securities analysts or investors, the market price of our common stock could fall significantly. Our results of operations in any quarter can fluctuate for many reasons, including:
- •
- our ability to implement rate increases;
- •
- the number of weeks in our fiscal quarter;
- •
- the number, scope, and timing of ongoing client engagements;
- •
- the extent to which we can reassign our employee consultants efficiently from one engagement to the next;
- •
- the extent to which our employee consultants take holiday, vacation, and sick time, including traditional seasonality related to summer vacation and winter holiday schedules;
- •
- employee hiring;
- •
- the extent of revenue realization or cost overruns;
- •
- fluctuations in the results and continuity of the operations and management of our software subsidiary, NeuCo;
- •
- fluctuations in our provision for income taxes due to changes in income arising in various tax jurisdictions, valuation allowances, non-deductible expenses, and changes in estimates of our uncertain tax positions;
- •
- fluctuations in interest rates;
- •
- severe weather conditions and other factors affecting employee productivity; and
- •
- collectibility of receivables and unbilled work in process.
Because we generate the majority of our revenues from consulting services that we provide on an hourly fee basis, our revenues in any period are directly related to the number of our employee consultants, their billing rates, and the number of billable hours they work in that period. We have a limited ability to increase any of these factors in the short term. Accordingly, if we underutilize our consultants during one part of a fiscal period, we may be unable to compensate by augmenting revenues during another part of that period. In addition, we are occasionally unable to utilize fully any additional consultants that we hire, particularly in the quarter in which we hire them. Moreover, a significant majority of our operating expenses, primarily office rent and salaries, are fixed in the short term. As a result, if our revenues fail to meet our projections in any quarter, that could have a disproportionate adverse effect on our net income. For these reasons, we believe our historical results of operations are not necessarily indicative of our future performance.
We could incur substantial costs protecting our proprietary rights from infringement or defending against a claim of infringement
As a professional services organization, we rely on non-competition and non-solicitation agreements with many of our employees and non-employee experts to protect our proprietary rights. These agreements, however, may offer us only limited protection and may not be enforceable in every jurisdiction. In addition, we may incur substantial costs trying to enforce these agreements.
Our services may involve the development of custom business processes or solutions for specific clients. In some cases, the clients retain ownership or impose restrictions on our ability to use the
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business processes or solutions developed from these projects. Issues relating to the ownership of business processes or solutions can be complicated, and disputes could arise that affect our ability to resell or reuse business processes or solutions we develop for clients.
In recent years, there has been significant litigation in the U.S. involving patents and other intellectual property rights. We could incur substantial costs in prosecuting or defending any intellectual property litigation, which could adversely affect our operating results and financial condition.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to obtain and use information that we regard as proprietary. Litigation may be necessary in the future to enforce our proprietary rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Any such resulting litigation could result in substantial costs and diversion of resources and could adversely affect our business, operating results and financial condition. Any failure by us to protect our proprietary rights could adversely affect our business, operating results and financial condition.
The market price of our common stock may be volatile
The market price of our common stock has fluctuated widely and may continue to do so. For example, from February 21, 2009, to February 19, 2010, the trading price of our common stock ranged from a high of $31.47 per share to a low of $16.77 per share. Many factors could cause the market price of our common stock to rise and fall. Some of these factors are:
- •
- variations in our quarterly results of operations;
- •
- the hiring or departure of key personnel or non-employee experts;
- •
- changes in our professional reputation;
- •
- the introduction of new services by us or our competitors;
- •
- acquisitions or strategic alliances involving us or our competitors;
- •
- changes in accounting principles or methods, such as Accounting Standards Codification ("ASC") 470-20, "Debt with Conversion and Other Options," (formerly FASB Staff Position Accounting Principles Board Opinion ("FSP No. APB") 14-1);
- •
- changes in estimates of our performance or recommendations by securities analysts;
- •
- future sales of shares of common stock in the public market; and
- •
- market conditions in the industry and the economy as a whole.
In addition, the stock market often experiences significant price and volume fluctuations. These fluctuations are often unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of our common stock. When the market price of a company's stock drops significantly, shareholders often institute securities class action litigation against that company. Any litigation against us could cause us to incur substantial costs, divert the time and attention of our management and other resources, or otherwise harm our business.
We may not be successful in obtaining approval from shareholders to increase the number of common shares issuable under our equity incentive plans
We are seeking shareholder approval of an amendment to the 2006 Equity Incentive Plan to increase the number of common shares available for issuance under the plan to meet anticipated future needs. We may not be successful in obtaining approval from our shareholders to increase the number of common shares issuable for future awards. This could adversely affect our ability to recruit and retain our employees, non-employee experts, and the members of our Board of Directors.
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Our debt obligations may adversely impact our financial performance
In 2004, we issued a total of $90.0 million of 2.875% convertible senior subordinated debentures due 2034. We had previously operated with little or no debt, and our previous payments of interest had not been material. The interest we are required to pay on these debentures reduces our net income each year and will continue to do so until the debentures are no longer outstanding. The terms of the debentures also include provisions that could accelerate our obligation to repay all amounts outstanding under the debentures if certain events happen, such as our failure to pay interest in a timely manner, failure to pay principal upon redemption or repurchase, failure to deliver cash, shares of common stock, or other property upon conversion and other specified events of default. In addition, on June 15, 2011, June 15, 2014, June 15, 2019, June 15, 2024 and June 15, 2029, or following specified fundamental changes, holders of the debentures may require us to repurchase their debentures for cash. On December 14, 2004, we irrevocably elected to settle with cash 100% of the principal amount of the debentures upon conversion thereof, and holders of the debentures may convert them if our stock price exceeds $50 per share for at least 20 out of the 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter. The market price conversion trigger was not met during the first quarter of fiscal 2010. Therefore, holders of the debentures are not able to exercise their right to convert the bonds during the second quarter of fiscal 2010. This test is repeated each fiscal quarter. To date, no holders have exercised their right to convert the bonds. However, during fiscal 2009 and fiscal 2008, we repurchased convertible debentures in the principal amount of $17.3 million and $10.2 million, respectively, on the open market.
We have a revolving line of credit for $60.0 million, to mitigate the potential liquidity risk, and to provide funding if required, in the event of conversion by the debenture holders. We intend to use the amounts available under our bank revolving line of credit, current cash balances, and cash generated from operations in the event debenture holders exercise their rights to convert. The amounts available under our bank revolving line of credit are constrained by various financial covenants and reduced by certain letters of credit outstanding. Our loan agreement will mature on April 30, 2012. The degree to which we are leveraged could adversely affect our ability to obtain further financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures. 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 and the overall credit and equity market environments.
Our reported earnings per share may be more volatile because of the accounting standards, rules, and regulations as they relate to our convertible senior subordinated debentures
Holders of our 2.875% convertible senior subordinated debentures due 2034 may convert the debentures only under certain circumstances, including certain stock price-related conversion contingencies. As further described in Note 10 of our Notes to Condensed Consolidated Financial Statements, we determine the effect of the debentures on earnings per share under the treasury stock method of accounting. The treasury stock method of accounting allows us to report dilution only when our average stock price per share for the reporting period exceeds the $40 conversion price and only to the extent of the additional shares we may be required to issue in the event our conversion obligation exceeds the principal amount of the debentures converted. Accordingly, volatility in our stock price could cause volatility in our reported diluted earnings per share.
The FASB recently issued ASC Topic 470-20, "Debt with Conversion and Other Options," (formerly FSP No. APB 14-1), which applies to any convertible debt instrument that may be settled in whole or in part with cash upon conversion, including our 2.875% debentures. Under ASC Topic 470-20, we are required to recognize non-cash interest expense on our convertible senior subordinated debentures based on the market rate for similar debt instruments without the conversion
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feature. ASC Topic 470-20 is effective for fiscal years beginning on or after December 15, 2008 and must be applied on a retrospective basis. Upon retroactive adoption of ASC 470-20 during the first quarter of fiscal 2010, we recorded a cumulative adjustment for prior years of $6.4 million, which represented a non-cash decrease in retained earnings through fiscal 2009. Also, on the date of issuance, the carrying amount of the convertible debentures was retroactively adjusted to reflect a discount of approximately $12.6 million and a reduction of deferred financing costs by approximately $0.5 million, with offsetting increases in common stock of approximately $6.9 million and deferred tax liability of $5.2 million. Under 470-20, in fiscal 2010, we expect to record incremental non-cash interest expense of approximately $1.4 million.
Our charter and by-laws, Massachusetts law and the terms of our convertible debentures may deter takeovers
Our amended and restated articles of organization and amended and restated by-laws and Massachusetts law contain provisions that could have anti-takeover effects and that could discourage, delay, or prevent a change in control or an acquisition that our shareholders and debenture holders may find attractive. These provisions may also discourage proxy contests and make it more difficult for our shareholders to take some corporate actions, including the election of directors. In addition, the terms of our convertible debentures provide that we may be required to pay a make-whole premium to the holders of our convertible debentures upon a change of control. These provisions could limit the price that investors might be willing to pay for shares of our common stock.
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 twelve weeks ended February 19, 2010. 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 quarter into three equal periods of four weeks.
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(3) | (d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs(3) | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
November 29, 2009 to December 25, 2009 | 662 shares(1 | ) | $ | 24.09 per share(1 | ) | — | 215,718 | ||||||
December 26, 2009 to January 22, 2010 | — | — | — | 215,718 | |||||||||
January 23, 2010 to February 19, 2010 | 25,566 shares(2 | ) | $ | 26.40 per share(2 | ) | — | 215,718 | ||||||
- (1)
- During the four weeks ended December 25, 2009, we repurchased 662 shares of our common stock, based on the contractual right of first purchase contained in the employees' restricted share agreements with us, at an average share price of $24.09 per share.
- (2)
- During the four weeks ended February 19, 2010, we accepted 24,767 shares of our common stock as a tax withholding from certain of our employees, in connection with the vesting of restricted shares that occurred during the indicated period, pursuant to the terms of our 2006 equity incentive plan, at an average share price of $26.40, and we repurchased 799 shares of our common stock, based on the contractual right of first purchase contained in the share agreements with us, at an average share price of $26.27 per share.
- (3)
- On June 14, 2007, we issued a press release announcing that our board of directors has approved the repurchase from time to time of up to 1,500,000 shares of our common stock, of which 1,284,282 shares of common stock were purchased in prior quarters and
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no shares were purchased in the first quarter of fiscal 2010. As of February 19, 2010, 215,718 shares of our common stock remain available for repurchase under this plan.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. (Removed and Reserved)
None.
| Item No. | Description | ||
|---|---|---|---|
| 31.1 | Rule 13a-14(a)/15d-14(a) certification of principal executive officer | ||
| 31.2 | Rule 13a-14(a)/15d-14(a) certification of principal financial officer | ||
| 32.1 | Section 1350 certification | ||
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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: March 29, 2010 | By: | /s/ PAUL A. MALEH Paul A. Maleh President, Chief Executive Officer | ||
Date: March 29, 2010 | By: | /s/ WAYNE D. MACKIE Wayne D. Mackie Executive Vice President, Treasurer, Chief Financial Officer | ||
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| Item No. | Description | ||
|---|---|---|---|
| 31.1 | Rule 13a-14(a)/15d-14(a) certification of principal executive officer | ||
31.2 | Rule 13a-14(a)/15d-14(a) certification of principal financial officer | ||
32.1 | Section 1350 certification | ||