CRA INTERNATIONAL, INC. 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements Except for historical facts, the statements in this quarterly report are forward-looking statements. Forward-looking statements are merely our current predictions of future events. These statements are inherently uncertain, and actual events could differ materially from our predictions. Important factors that could cause actual events to vary from our predictions include those discussed below under the heading “Risk Factors.” We assume no obligation to update our forward-looking statements to reflect new information or developments. We urge readers to review carefully the risk factors described in the other documents that we file with the Securities and Exchange Commission, or SEC. You can read these documents at www.sec.gov. Our principal Internet address is www.crai.com. Our website provides a link to a third-party website through which our annual, quarterly, and current reports, and amendments to those reports, are available free of charge. We believe these reports are made available as soon as reasonably practicable after we file them electronically with, or furnish them to, the SEC. We do not maintain or provide any information directly to the third-party website, and we do not check its accuracy. Our website also includes information about our corporate governance practices. The Investor Relations page of our website provides a link to a web page where you can obtain a copy of our code of business conduct and ethics applicable to our principal executive officer, principal financial officer, and principal accounting officer. COVID-19 Assessment While the COVID-19 pandemic did not materially adversely affect our financial results and business operations during the current fiscal quarter and fiscal year-to-date periods ended September 26, 2020, the COVID-19 pandemic may continue to pose significant risks to our business. The public health actions being undertaken to reduce the spread of the virus may create significant disruptions with respect to the demand for our services and impact our ability to conduct business activities in the ordinary course for an indefinite period. Since March 16, 2020, when we implemented our stay-at-home policy and successfully transitioned to a virtual work environment, we have been closely monitoring the COVID-19 pandemic and its impacts and potential impacts on our business. However, because developments with respect to the spread of COVID-19 and its impacts have been occurring so rapidly and because of the unprecedented nature of the pandemic, we are unable to predict the extent of any adverse financial impact of COVID-19 on our business, financial condition, results of operations and cash flows. Due to the above circumstances and as described generally in this Form 10-Q, our results of operations for the fiscal quarter and fiscal year-to-date periods ended September 26, 2020 are not necessarily indicative of the results to be expected for the full fiscal year. As of September 26, 2020, we have $24.1 million of cash and cash equivalents and $82.3 million of borrowing capacity under our $125.0 million revolving credit facility. We believe our cash and cash equivalents and borrowing capacity, when combined with our ongoing operating cash flows, is sufficient to meet our operating needs over the next twelve months. We have implemented enhanced safety procedures and enhanced cleaning protocols at our facilities to protect the health of our colleagues. Although our offices remain open and capable of hosting our colleagues, we have invited them to work wherever they feel most comfortable. Please see “Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q for an additional discussion of risks and potential risks of the COVID-19 pandemic on our business, financial condition and results of operations. Critical Accounting Policies and Significant Estimates Our critical accounting policies involving the more significant estimates and judgments used in the preparation of our financial statements as of September 26, 2020 remain unchanged from December 28, 2019. Please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 28, 2019, filed with the Securities and Exchange Commission on February 27, 2020, for details on these critical accounting policies. Recent Accounting Standards Please refer to the sections captioned “Recent Accounting Standards Adopted” and “Recent Accounting Standards Not Yet Adopted” included in Note 1, “Summary of Significant Accounting Policies” in Part I, Item I, “Financial Statements” of this report. 19 Table of Contents Results of Operations—For the Fiscal Quarter and Fiscal Year-to-Date Periods Ended September 26, 2020, Compared to the Fiscal Quarter and Fiscal Year-to-Date Periods Ended September 28, 2019 The following table provides operating information as a percentage of revenues for the periods indicated: ​ Fiscal Quarter Ended Fiscal Year-to-Date Period Ended ​ September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019 Revenues 100.0 % 100.0 % 100.0 % 100.0 % Costs of services (exclusive of depreciation and amortization) 72.5 72.4 72.6 70.3 Selling, general and administrative expenses 18.2 19.4 18.3 20.8 Depreciation and amortization 2.7 2.2 2.5 2.3 Income from operations 6.6 6.0 6.6 6.6 Interest expense, net (0.2) (0.4) (0.3) (0.3) Foreign currency gains (losses), net (0.2) 0.2 0.3 (0.1) Income before provision for income taxes 6.2 5.8 6.6 6.2 Provision for income taxes 1.7 0.8 1.8 1.4 Net income 4.4 % 5.0 % 4.8 % 4.8 % Fiscal Quarter Ended September 26, 2020, Compared to the Fiscal Quarter Ended September 28, 2019 Revenues. Revenues increased by $6.1 million, or 5.3%, to $121.8 million for the third quarter of fiscal 2020 from $115.7 million for the third quarter of fiscal 2019. The increase in net revenue was a result of an increase in gross revenues of $6.3 million as compared to the third quarter of fiscal 2019, partially offset by an increase in write-offs and reserves of $0.2 million compared to the third quarter of fiscal 2019. Utilization decreased to 69% for the third quarter of fiscal 2020 from 76% for the third quarter of fiscal 2019, primarily driven by the increase in consultant headcount, which grew 11.5% from 741 at the end of the third quarter of fiscal 2019 to 826 at the end of the third quarter of fiscal 2020. Included in revenues are the effect of changes in currency exchange rates resulting in an increase to revenue of $0.9 million for the third quarter of fiscal 2020, and a decrease of $1.1 million for the third quarter of fiscal 2019. Overall, revenues outside of the U.S. represented approximately 21% and 20% of net revenues for the third quarter of fiscal 2020 and fiscal 2019, respectively. Revenues derived from fixed-price projects decreased to 22% of total revenues for the third quarter of fiscal 2020 compared with 26% of net revenues for the third quarter of fiscal 2019. The percentage of revenue derived from fixed-price projects depends largely on the proportion of our revenues derived from our management consulting business, which typically has a higher concentration of fixed-price service contracts. Costs of Services (exclusive of depreciation and amortization). Costs of services (exclusive of depreciation and amortization) increased by $4.5 million, or 5.4%, to $88.3 million for the third quarter of fiscal 2020 from $83.8 million for the third quarter of fiscal 2019. The increase in costs of services was due primarily to an increase of $5.3 million in employee compensation and fringe benefit costs attributable to our increased consultant headcount, an increase in incentive and retention compensation costs of $1.3 million and an increase in forgivable loan amortization of $1.2 million. These increased expenses were partially offset by a decrease in stock compensation of $0.3 million and a decrease in the valuation expense of the contingent consideration of $2.1 million. Additionally, client reimbursable expenses decreased by $0.9 million in the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019. As a percentage of revenues, costs of services (exclusive of depreciation and amortization) increased to 72.5% for the third quarter of fiscal 2020 from 72.4% for the third quarter of fiscal 2019.​ Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $0.2 million, or 1.1%, to $22.2 million for the third quarter of fiscal 2020 from $22.4 million for the third quarter of fiscal 2019. Within this category of expenses, there was a $2.0 million decrease in travel and entertainment, a $0.7 million decrease in legal and other professional services fees, and a $0.2 million decrease in training and marketing. Partially offsetting the decrease in expenses was a $0.6 million increase in commissions to our non-employee experts, a $0.5 million increase in rent expense attributed to our Oakland and New York offices, a $0.2 million increase in software subscription and data services, a $0.9 million increase in employee and incentive compensation, a $0.2 million increase in bad debt expense, and a $0.3 million increase in other expenses for the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019. 20 Table of Contents As a percentage of revenues, selling, general and administrative expenses decreased to 18.2% for the third quarter of fiscal 2020 from 19.4% for the third quarter of fiscal 2019. Commissions to our non-employee experts increased to 3.0% of revenues for the third quarter of fiscal 2020 compared to 2.6% of revenues for the third quarter of fiscal 2019. Provision for Income Taxes. The income tax provision was $2.1 million and the effective tax rate was 28.2% for the third quarter of fiscal 2020 compared to $1.0 million and 14.2% for the third quarter of fiscal 2019. The effective tax rate for the third quarter of fiscal 2020 was higher than the prior year primarily due to the release of tax reserves recorded in the prior year as well as the increased provision related to remeasuring the U.S. deferred tax assets and liabilities based on expected fiscal 2020 state apportionment. This was partially offset by an increase in the tax benefit related to the accounting for stock-based compensation and a decrease in non-deductible meals and entertainment in the current year. The effective tax rate for the third quarter of fiscal 2020 was slightly higher than the combined federal and state statutory tax rate due to non-deductible items resulting primarily from limitations of compensation paid to executive officers as well as the remeasurement of U.S. deferred tax assets and liabilities as previously noted, partially offset by the tax benefit related to the accounting for stock-based compensation. The effective tax rate in the third quarter of fiscal 2019 was lower than the combined federal and state statutory tax rate primarily due to the reversal of tax reserves as a result of expiration of statutes of limitation, the tax benefit related to the accounting for stock-based compensation, and the remeasurement of U.S deferred tax assets and liabilities based on expected fiscal 2019 applicable state apportionment and statutory rates, partially offset by non-deductible items resulting from limitations of compensation paid to executive officers and the deductibility of meals and entertainment. Net Income. Net income decreased by $0.3 million to $5.4 million for the third quarter of fiscal 2020 from $5.7 million for the third quarter of fiscal 2019. The net income per diluted share was $0.68 per share for the third quarter of fiscal 2020, compared to $0.71 of net income per diluted share for the third quarter of fiscal 2019. Weighted average diluted shares outstanding decreased by approximately 116,000 shares to approximately 7,934,000 shares for the third quarter of fiscal 2020 from approximately 8,050,000 shares for the third quarter of fiscal 2019. The decrease in weighted average diluted shares outstanding was primarily due to the repurchase of shares of our common stock since September 28, 2019, offset in part by the vesting of shares of restricted stock and time-vesting restricted stock units, and the exercise of stock options since September 28, 2019. Fiscal Year-to-Date Period Ended September 26, 2020, Compared to the Fiscal Year-to-Date Period Ended September 28, 2019 Revenues. Revenues increased by $38.8 million, or 11.7%, to $371.0 million for the fiscal year-to-date period ended September 26, 2020 from $332.1 million for the fiscal year-to-date period ended September 28, 2019. The increase in net revenue was a result of an increase in gross revenues of $38.0 million as compared to the fiscal year-to-date period ended September 28, 2019, and a decrease in write-offs and reserves of $0.8 million as compared to the fiscal year-to-date period ended September 28, 2019. Utilization decreased to 69% for the fiscal year-to-date period ended September 26, 2020 from 76% for the fiscal year-to-date period ended September 28, 2019, primarily driven by the increase in consultant headcount, which grew 11.5% from 741 at September 28, 2019 to 826 at September 26, 2020. Included in revenues are the effect of changes in currency exchange rates resulting in a decrease in revenue of $0.2 million for the fiscal year-to-date period ended September 26, 2020 and a decrease in revenue of $3.8 million for the fiscal year-to-date period ended September 28, 2019, respectively. Overall, revenues outside of the U.S. represented approximately 20% and 21% of net revenues for the fiscal year-to-date periods ended September 26, 2020 and September 28, 2019, respectively. Revenues derived from fixed-price projects were 23% of net revenues for each of the fiscal year-to-date periods ended September 26, 2020 and September 28, 2019. The percentage of revenue derived from fixed-price projects depends largely on the proportion of our revenues derived from our management consulting business, which typically has a higher concentration of fixed-price service contracts. Costs of Services (exclusive of depreciation and amortization). Costs of services (exclusive of depreciation and amortization) increased by $36.1 million, or 15.4%, to $269.5 million for the fiscal year-to-date period ended September 26, 2020 from $233.4 million for the fiscal year-to-date period ended September 28, 2019. The increase in costs of services was due primarily to an increase of $17.1 million in employee compensation and fringe benefit costs associated with our increased consulting headcount, an increase in incentive and retention compensation costs of $11.1 million, an increase in forgivable loan amortization of $3.1 million, and an increase in expense related to other compensation of $1.9 million, partially offset by a decrease in the valuation expense of the contingent consideration of $1.5 million and a decrease in stock compensation expense of $0.7 million. Additionally, client reimbursable expenses increased by $5.1 million in the fiscal year-to-date period ended September 26, 2020 compared to the fiscal year-to-date period ended September 28, 2019. As a percentage of revenues, costs of services (exclusive of depreciation and amortization) increased to 72.6% for the fiscal year-to-date period ended September 26, 2020 from 70.3% for the fiscal year-to-date period ended September 28, 2019. 21 Table of Contents Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $1.2 million, or 1.7%, to $67.7 million for the fiscal year-to-date period ended September 26, 2020 from $68.9 million for the fiscal year-to-date period ended September 28, 2019. The primary contributors to this decrease were a $4.4 million decrease in travel and entertainment, a $1.8 million decrease in legal and other professional services fees, a $0.7 million decrease in training and marketing, and a $0.2 million decrease in commissions to non-employee experts. These decreases were partially offset by increases of $3.6 million in rent expense primarily due to additional space in our Oakland and New York offices, employee and incentive compensation of $1.4 million, other costs of $0.1 million, and software subscriptions and data services of $0.8 million. As a percentage of revenues, selling, general and administrative expenses decreased to 18.3% for the fiscal year-to-date period ended September 26, 2020 from 20.8% for the fiscal year-to-date period ended September 28, 2019. Commissions to our non-employee experts decreased to 2.5% of revenues for the fiscal year-to-date period ended September 26, 2020 compared to 2.9% of revenues for the fiscal year-to-date period ended September 28, 2019 as less revenue was sourced by non-employee experts in the fiscal year-to-date period ended September 26, 2020 compared to the fiscal year-to-date period ended September 28, 2019. Provision for Income Taxes. For the fiscal year-to-date period ended September 26, 2020, our income tax provision was $6.7 million, and the effective tax rate was 27.5%, compared to a provision of $4.8 million and an effective tax rate of 22.9% for the fiscal year-to-date period ended September 28, 2019. The effective tax rate for the fiscal year-to-date period ended September 26, 2020 was higher than the prior year due to the release of tax reserves recorded in the prior year as well as the increased provision related to remeasuring the U.S. deferred tax assets and liabilities based on expected fiscal 2020 state apportionment. The effective tax rate in the fiscal year-to-date period ended September 26, 2020 was the same as the combined federal and state statutory tax rate but included increases in the rate for non-deductible compensation paid to executive officers and the remeasurement of U.S. deferred tax assets and liabilities, offset by decreases in the rate related to the accounting for stock-based compensation. The effective tax rate in the fiscal year-to-date period ended September 28, 2019 was lower than the combined federal and state statutory tax rate primarily due to the release of tax reserves as a result of expiration of statutes of limitation, the tax benefit related to the accounting for stock-based compensation, and the remeasurement of U.S deferred tax assets and liabilities based on the expected fiscal 2019 applicable state apportionment and statutory rates, partially offset by non-deductible items resulting from limitations of compensation paid to executive officers and the deductibility of meals and entertainment. Net Income. Net income increased by $1.8 million to $17.8 million for the fiscal year-to-date period ended September 26, 2020 from $16.0 million for the fiscal year-to-date period ended September 28, 2019. The diluted net income per share was $2.23 for the fiscal year-to-date period ended September 26, 2020, compared to diluted net income per share of $1.94 for the fiscal year-to-date period ended September 28, 2019. Diluted weighted average shares outstanding decreased by approximately 241,000 to approximately 7,964,000 shares for the fiscal year-to-date period ended September 26, 2020 from approximately 8,205,000 shares for the fiscal year-to-date period ended September 28, 2019. The decrease in weighted average diluted shares outstanding was primarily due to the repurchase of shares of our common stock since September 28, 2019, offset in part by the vesting of restricted stock and time-vesting restricted stock units and the exercise of stock options since September 28, 2019. Liquidity and Capital Resources Fiscal Year-to-Date Period Ended September 26, 2020 We believe that our current cash, cash equivalents, cash generated from operations, and amounts available under our bank revolving line of credit will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 12 months. General. During the fiscal year-to-date period ended September 26, 2020, cash and cash equivalents decreased by $1.5 million. We completed the period with cash and cash equivalents of $24.1 million. The principal drivers of the reduction of cash were payment of a significant portion of our fiscal 2019 performance bonuses in the first and second quarters of 2020, the funding of forgivable loans, the repurchase of shares, the payment of dividends, and capital expenditures related to the build-out of the new Oakland and New York office spaces, offset by net borrowings of $38.0 million. During the fiscal year-to-date period ended September 26, 2020, working capital decreased by $13.2 million such that current liabilities were in excess of current assets by $0.5 million. The reduction in working capital is due in large part to the reclassification to a current liability of our contingent consideration liability of $13.5 million, which is due to be paid during the second quarter of fiscal 2021. Also contributing to the reduction in working capital is the $38.0 million of borrowings during 22 Table of Contents the first half of fiscal 2020, a portion of which was used to fund long-term investments, such as forgivable loan issuances and leasehold improvements, much of which are classified as non-current assets. Offsetting these reductions in working capital were increases in accounts receivable and unbilled services of $13.3 million. Of the total cash and cash equivalents held at September 26, 2020, $1.9 million was held within the U.S. We have sufficient sources of liquidity in the U.S., including cash from operations and available borrowing capacity under our revolving credit facility, to fund U.S. activities for the next 12 months. Sources and Uses of Cash. During the fiscal year-to-date period ended September 26, 2020, net cash used in operating activities was $10.6 million. Net income was $17.8 million for the fiscal year-to-date period ended September 26, 2020. The primary factor in cash used in operations was the decrease in the “accounts payable, accrued expenses, and other liabilities” line item of our condensed consolidated statement of cash flows of $15.2 million due to the payment of a significant portion of our fiscal 2019 performance bonuses and performance awards. Other uses of cash included an increase of $15.0 million in unbilled receivables due primarily to the increase in revenues, a $1.0 million increase in prepaid expenses and other current assets, and a $5.5 million decrease in lease liabilities. The increase in forgivable loans for the period of $19.0 million was primarily driven by $38.5 million of forgivable loan issuances, net of repayments, offset by $19.5 million of forgivable loan amortization. Offsetting these uses of cash was a $1.1 million decrease in accounts receivable, net of allowances. Cash provided by operations included incentive cash award expense of $4.9 million, non-cash depreciation and amortization expense of $9.3 million, ROU amortization of $8.9 million, share-based compensation expenses of $2.4 million, and other non-cash expenses of $0.7 million. During the fiscal year-to-date period ended September 26, 2020, net cash used in investing activities was $15.7 million for capital expenditures primarily related to the build-out of the new Oakland and New York offices. During the fiscal year-to-date period ended September 26, 2020, net cash provided by financing activities was $25.1 million, primarily as a result of borrowings, net of repayments, under the revolving line of credit of $38.0 million and $1.7 million received upon the issuance of shares of common stock related to the exercise of stock options. Offsetting these increases in cash were the tax withholding payments reimbursed by restricted shares of $0.4 million, payment of $5.4 million of cash dividends to shareholders, and $8.8 million of repurchases of common stock. Indebtedness We are party to a credit agreement that provides us with a $125.0 million revolving credit facility and a $15.0 million sublimit for the issuance of letters of credit. We may use the proceeds of the revolving credit facility to provide working capital and for other general corporate purposes. Generally, we may repay any borrowings under the revolving credit facility at any time, but we must repay all borrowings no later than October 24, 2022. There was $38.0 million in outstanding borrowings under this revolving line of credit as of September 26, 2020. The amount available under this revolving line of credit is reduced by certain letters of credit outstanding, which amounted to $4.7 million as of September 26, 2020. Borrowings under the revolving credit facility bear interest at a rate per annum, at our election, of either (i) the adjusted base rate, as defined in the credit agreement, plus an applicable margin, which varies between 0.25% and 1.25% depending on our total leverage ratio as determined under the credit agreement, or (ii) the adjusted eurocurrency rate, as defined in the credit agreement, plus an applicable margin, which varies between 1.25% and 2.25% depending on our total leverage ratio. We are required to pay a fee on the unused portion of the revolving credit facility at a rate per annum that varies between 0.20% and 0.35% depending on our total leverage ratio. Borrowings under the revolving credit facility are secured by 100% of the stock of certain of our U.S. subsidiaries and 65% of the stock of certain of our foreign subsidiaries, which represent approximately $36.2 million in net assets as of September 26, 2020. Under the credit agreement, we must comply with various financial and non-financial covenants. Compliance with these financial covenants is tested on a fiscal quarterly basis. Any indebtedness outstanding under the revolving credit facility may become immediately due and payable upon the occurrence of stated events of default, including our failure to pay principal, interest or fees or a violation of any financial covenant. The financial covenants require us to maintain an adjusted consolidated EBITDA to consolidated interest expense ratio of more than 2.5:1.0 and to comply with a consolidated debt to adjusted consolidated EBITDA ratio of not more than 3.0:1.0. The non-financial covenant restrictions of the senior credit agreement include, but are not limited to, our ability to incur additional indebtedness, engage in acquisitions or dispositions, and enter into business combinations. As of September 26, 2020, we were in compliance with the covenants of our credit agreement. Forgivable Loans and Term Loans 23 Table of Contents In order to attract and retain highly skilled professionals, we may issue forgivable loans or term loans to employees and non-employee experts. A portion of these loans is collateralized by key person life insurance. The forgivable loans have terms that are generally between two and eight years. The principal amount of forgivable loans and accrued interest is forgiven by us over the term of the loans, so long as the employee or non-employee expert continues employment or affiliation with us and complies with certain contractual requirements. The expense associated with the forgiveness of the principal amount of the loans is recorded as compensation expense over the service period, which is consistent with the term of the loans. Compensation Arrangements We have entered into compensation arrangements for the payment of incentive performance awards to certain of our employees and non-employee experts if specific performance targets are met. The amounts of the awards to be paid under these compensation arrangements could fluctuate depending on future performance through the respective measurement periods. Increases in estimated awards are expensed prospectively over the remaining service period. Decreases in estimated awards are recorded in the period incurred. We believe that we will have sufficient funds to satisfy any obligations related to the incentive performance awards. We expect to fund these payments, if any, from existing cash resources, cash generated from operations, or borrowings on our revolving credit facility. Business and Talent Acquisitions As part of our business, we regularly evaluate opportunities to acquire other consulting firms, practices or groups or other businesses. In recent years, we have typically paid for acquisitions with cash, or a combination of cash and our common stock, and we may continue to do so in the future. To pay for an acquisition, we may use cash on hand, cash generated from our operations, borrowings under our revolving credit facility, or we may pursue other forms of financing. Our ability to secure short-term and long-term debt or equity financing in the future will depend on several factors, including our future profitability, the levels of our debt and equity, restrictions under our revolving credit facility, and the overall credit and equity market environments. Share Repurchases In February 2020, our Board of Directors authorized an expansion to our existing share repurchase program, authorizing the purchase of an additional $20.0 million of our common stock. We may repurchase shares under this program in open market purchases (including through any Rule 10b5-1 plan adopted by us) or in privately negotiated transactions in accordance with applicable insider trading and other securities laws and regulations. During the fiscal quarter and fiscal year-to-date periods ended September 26, 2020, we repurchased and retired 110,154 shares and 192,767 shares, respectively, under our share repurchase program at an average price per share of $45.39 and $45.72, respectively. During the fiscal quarter and fiscal year-to-date periods ended September 28, 2019, we repurchased and retired 157,402 shares and 421,112 shares, respectively, under our share repurchase program at an average price per share of $41.69 and $42.94, respectively. As of September 26, 2020, we had approximately $14.7 million available for future repurchases under our share repurchase program. We plan to finance future repurchases with available cash, cash from future operations, and funds from our revolving credit facility. Dividends to Shareholders We anticipate paying regular quarterly dividends each year. These dividends are anticipated to be funded through cash flow from operations, available cash on hand, and/or borrowings under our revolving credit facility. Although we anticipate paying regular quarterly dividends on our common stock for the foreseeable future, the declaration of any future dividends is subject to the discretion of our Board of Directors. During the fiscal quarter and fiscal year-to-date periods ended September 26, 2020, we paid dividends of $1.8 million and $5.4 million, respectively. During the fiscal quarter and fiscal year-to-date periods ended September 28, 2019, we paid dividends of $1.5 million and $4.8 million, respectively. Impact of Inflation To date, inflation has not had a material impact on our financial results. There can be no assurance, however, that inflation will not adversely affect our financial results in the future. Future Capital and Liquidity Needs We anticipate that our future capital and liquidity needs will principally consist of funds required for: 24 Table of Contents • operating and general corporate expenses relating to the operation of our business, including the compensation of our employees under various annual bonus or long-term incentive compensation programs; • the hiring of individuals to replenish and expand our employee base; • capital expenditures, primarily for information technology equipment, office furniture and leasehold improvements; • debt service and repayments, including interest payments on borrowings under our revolving credit facility; • share repurchases, under programs that we may have in effect from time to time; • dividends to shareholders; • potential acquisitions of businesses that would allow us to diversify or expand our service offerings; • contingent obligations related to our acquisitions; and • other known future contractual obligations. The hiring of individuals to replenish and expand our employee base is an essential part of our business operations and has historically been funded principally from operations. Many of the other above activities are discretionary in nature. For example, capital expenditures can be deferred, acquisitions can be forgone, and share repurchase programs and regular dividends can be suspended. As such, our operating model provides flexibility with respect to the deployment of cash flow from operations. Given this flexibility, we believe that our cash flows from operations, supplemented by cash on hand and borrowings under our revolving credit facility (as necessary), will provide adequate cash to fund our long-term cash needs from normal operations for at least the next twelve months. Our conclusion that we will be able to fund our cash requirements by using existing capital resources and cash generated from operations does not take into account the impact of any future acquisition transactions or any unexpected significant changes in the number of employees or other expenditures that are currently not contemplated. The anticipated cash needs of our business could change significantly if we pursue and complete additional business acquisitions, if our business plans change, if economic conditions change from those currently prevailing or from those now anticipated (including in connection with the COVID-19 pandemic), or if other unexpected circumstances arise that have a material effect on the cash flow or profitability of our business. Any of these events or circumstances, including any new business opportunities or the length and severity of the COVID-19 pandemic, could involve or result in significant additional funding needs in excess of the identified currently available sources and could require us to raise additional debt or equity funding to meet those needs on terms that may be less favorable compared to our current sources of capital. Our ability to raise additional capital over the next 12 months, if necessary, is subject to a variety of factors that we cannot predict with certainty, including: • our future profitability; • the quality of our accounts receivable; • our relative levels of debt and equity; • the volatility and overall condition of the capital markets; and • the market prices of our securities. Factors Affecting Future Performance Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Quarterly Report on Form 10-Q, as well as a description of material risks we face, are set forth below under the heading “Risk Factors” and included in Part I, Item 1A “Risk Factors” of the 2019 Form 10-K. If any of these risks, or any risks not presently known to us or that we currently believe are not significant, develops into an actual event, then our business, financial condition, and results of operations could be adversely affected.