CRA INTERNATIONAL, INC. 10-K

Item 7 —Management's Discussion and Analysis of Financial Condition and Results of Operations This section of the Form 10-K does not address certain items regarding the year ended December 29, 2018. Discussion and analysis of fiscal 2018 and year-to-year comparisons between fiscal 2019 and fiscal 2018 not included in this Form 10-K 22 Table of Contents can be found in "Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations" of our Annual Report on Form 10-K for the year ended December 28, 2019. Overview We are a leading worldwide economic, financial, and management consulting firm that applies advanced analytic techniques and in-depth industry knowledge to complex engagements for a broad range of clients. We derive revenues principally from professional services rendered by our employee consultants. In most instances, we charge clients on a time-and-materials basis and recognize revenues in the period when we provide our services. We charge consultants' time at hourly rates, which vary from consultant to consultant depending on a consultant's position, experience, expertise, and other factors. We derive a portion of our revenues from fixed-price engagements. Revenues from fixed-price engagements are recognized using a proportional performance method based on the ratio of costs incurred to the total estimated project costs. We generate substantially all of our professional services fees from the work of our own employee consultants and a portion from the work of our non-employee experts. Factors that affect our professional services revenues include the number and scope of client engagements, the number of consultants we employ, the consultants' billing rates, and the number of hours our consultants work. Revenues also include reimbursements for costs we incur in fulfilling our performance obligations, including travel and other out-of-pocket expenses, fees for outside consultants and other reimbursable expenses. Our costs of services include the salaries, bonuses, share-based compensation expense, forgivable loan amortization, and benefits of our employee consultants. Our bonus program awards discretionary bonuses based on our revenues and profitability and individual performance. Costs of services also include out-of-pocket and other expenses, and the salaries of support staff whose time is billed directly to clients, such as librarians, editors, and programmers, as well as the amounts billed to us by our outside consultants for services rendered while completing a project. Selling, general, and administrative expenses include salaries, bonuses, share-based compensation expense, and benefits of our administrative and support staff, fees to non-employee experts for generating new business, office rent, marketing, and other costs. While the COVID-19 pandemic did not materially adversely affect our financial results and business operations during fiscal 2020, the COVID-19 pandemic may continue to pose 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. Due to the above circumstances and as described generally in this Form 10-K, our results of operations for fiscal 2020 are not necessarily indicative of the results to be expected for future fiscal years. 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. See Item 1A in this annual report on Form 10-K for an additional discussion of risks and potential risks of the COVID-19 pandemic on our business, financial condition and results of operations. Utilization and Seasonality We derive the majority of our revenues from the number of hours worked by our employee consultants. Our utilization of those employee consultants is one key indicator that we use to measure our operating performance. We calculate utilization by dividing the total hours worked by our employee consultants on engagements during the measurement period by the total number of hours that our employee consultants were available to work during that period. Utilization was 69%, 75%, and 76% for fiscal 2020, fiscal 2019, and fiscal 2018, respectively. We experience certain seasonal effects that impact our revenue. Concurrent vacations or holidays taken by a large number of consultants can adversely impact our revenue. For example, we usually experience fewer billable hours in our fiscal third quarter, as that is the summer vacation season for most of our offices, and in our fiscal fourth quarter, as that is the quarter that typically includes the December holiday season. In addition, much of our junior staff hiring occurs in our fiscal third quarter during which our new colleagues receive training and become acclimated to the organization. As a result, utilization may be impacted for the latter half of the year. 23 Table of Contents International Operations Revenues outside of the U.S. accounted for approximately 20%, 21%, and 21% of our total revenues in fiscal 2020, fiscal 2019, and fiscal 2018, respectively. Revenue by country is detailed in Note 2 to our Notes to Consolidated Financial Statements. Noncontrolling Interest Please refer to the section captioned "Basis of Presentation" in Note 1 of our Notes to Consolidated Financial Statements contained in this Form 10-K. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets and liabilities, as well as related disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if our assumptions based on past experience or our other assumptions do not turn out to be substantially accurate. Our significant accounting policies are discussed in Note 1 in our Notes to Consolidated Financial Statements. A summary of the accounting policies that we believe are most critical to understanding and evaluating our financial results is set forth below. We believe the following accounting policies involve our more subjective and complex judgments that have the most significant potential impact to the presentation of our financial statements. This summary should be read in conjunction with our consolidated financial statements and the related notes included in Item 8 of this annual report on Form 10-K. Revenue Recognition. We adopted ASC Topic 606, Revenue from Contracts with Customers ("ASC 606") on December 31, 2017 using the modified retrospective method for all contracts not completed as of the date of adoption. Revenue is recognized under ASC 606 when we satisfy a performance obligation by transferring services promised in a contract to a client in an amount that reflects the consideration that we expect to receive in exchange for those services. Performance obligations in our contracts represent distinct or separate service streams that we provide to our clients. We evaluate our revenue contracts with clients based on the five-step model under ASC 606: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to separate performance obligations; and (5) recognize revenues when (or as) each performance obligation is satisfied. If, at the outset of an arrangement, we determine that an enforceable contract does not exist, revenues are deferred until all criteria for an enforceable contract are met. We derive substantially all of our revenues from the performance of professional services for our clients. The contracts that we enter into and operate under specify whether the engagement will be billed on a time-and-materials basis or a fixed-price basis. These engagements generally last three to six months, although some of our engagements can be much longer in duration. • Time-and-materials arrangements require the client to pay us based on the number of hours worked at contractually agreed-upon hourly rates. We recognize revenues from these arrangements based on hours incurred and contracted rates based on a right-to-payment for services completed to date. When a time-and-materials arrangement has a "cap" or "limit" amount, we recognize revenue up to the cap or limit amount specified by the client, based on the efforts or hours incurred and expenses incurred. Thereafter, revenue is reserved pending an amendment of the cap or limit. • Fixed-price arrangements require the client to pay a contractually agreed-upon fee in exchange for a pre-established set of professional services. We base our fees on our estimates of the costs and timing for completing a performance obligation. We generally recognize revenues under fixed-price arrangements using a proportional performance method, which is based on the ratio of costs incurred to the total estimated costs for completing a performance obligation. Our fixed-price arrangements generally have a single performance obligation. For arrangements that 24 Table of Contents contain multiple performance obligations, the fixed price is allocated based on the estimated relative standalone selling prices of the promised services underlying each performance obligation. Variable consideration to be included in the transaction price is estimated using either the expected value method or the most likely method based on facts and circumstances. Variable consideration is included in the transaction price if it is probable that a significant future reversal of cumulative revenue under the contract will not occur. We base our estimate of variable consideration on historical realization rates. Reimbursable expenses, including those relating to travel, out-of-pocket expenses, outside consultants and other outside service costs, are generally included in revenues, and an equivalent amount of reimbursable expenses is included in costs of services in the period in which the expense is incurred. Differences between the timing of billing and the recognition of revenue are recognized as either unbilled services or deferred revenues in the accompanying consolidated balance sheets. Revenues recognized for services performed but not yet billed to clients are recorded as unbilled services. Client prepayments and retainers are classified as deferred revenues and recognized over future periods as earned in accordance with the applicable retention agreement. Deferred Compensation. We account for performance-based and service-based cash awards using an accrual method where changes in estimates are accounted for prospectively over the remaining service period. To the extent the terms of an award attribute all or a portion of the expected future benefits to a period of service greater than one year, the cost of those benefits is accrued over the employee's or non-employee's requisite service period in a systematic and rational manner, usually on a straight-line basis. The requisite service period typically ranges from three to six years starting with the employee's employment date or non-employee's affiliation date. For an employee or non-employee consultant currently affiliated with us, the requisite service period generally begins at the start of the award's measurement period. A recipient of such an award is expected to be employed by or affiliated with us for the entire measurement period. If the recipient's employment or affiliation with us terminates during the measurement period, the amount paid will be determined in accordance with the recipient's specific contract provisions. The terms of award agreements may include the achievement of minimum required financial targets over the award's measurement period. These financial targets may include a measure of revenue generation, profitability or both. The amount of the liability of the award agreements is estimated based on internally generated financial projections. The process of projecting these financial targets over the measurement period is highly subjective and requires significant judgment and estimates. There can be no assurance that the estimates and assumptions used in preparing these projections will prove to be accurate. Valuation of the Contingent Consideration Liability. In prior periods, we had accounted for our contingent consideration liability by remeasuring the obligation to fair value each reporting period, estimated based on a Monte Carlo simulation. The fair value measurement of these liabilities was based on significant inputs not observed in the market. The significant unobservable inputs used in the fair value measurements of these contingent consideration liabilities were our measures of the estimated payouts based on internally generated revenue projections, expected volatility of the revenue projections, and discount rates. The process of developing financial projections is highly subjective and requires significant judgment and estimates. There can be no assurance that the estimates and assumptions used in preparing these projections will prove to be accurate. We reassess the fair value of these contingent consideration liabilities on a quarterly basis using additional information as it becomes available. Any change in the fair value estimates are recorded in the earnings of that period. As of the current fiscal year end, the liability was estimated using an accrual method that approximates the fair value, as the end of the measurement period occurs in January 2021. Accounting for Income Taxes. We record income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized based on estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. We include in our estimate of deferred tax assets and liabilities an estimate of the realizable benefits from 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 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; expenses by jurisdiction; and results of acquisitions or dispositions. 25 Table of Contents 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. These reviews include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. We account for uncertainties in income tax positions in accordance with ASC Topic 740. The number of years with open tax audits varies depending on the tax jurisdiction. Recent Accounting Standards Adopted and Not Yet Adopted Please refer to the sections captioned "Recent Accounting Standards Adopted" and "Recent Accounting Standards Not Yet Adopted" in Note 1 of our Notes to Consolidated Financial Statements contained in this Form 10-K. Results of Operations The following table provides operating information as a percentage of revenues for the periods indicated: Fiscal Year Ended January 2, 2021 (53 weeks) December 28, 2019 (52 weeks) December 29, 2018 (52 weeks) Revenues 100.0 % 100.0 % 100.0 % Costs of services (exclusive of depreciation and amortization) 72.9 70.4 69.2 Selling, general and administrative expenses 17.7 20.7 21.5 Depreciation and amortization 2.5 2.4 2.4 Income from operations 6.8 6.5 6.9 GNU gain on liquidation — — 0.1 Interest expense, net (0.2) (0.3) (0.2) Foreign currency gains (losses), net (1) — (0.3) 0.1 Income before provision for income taxes 6.6 5.9 6.9 Provision for income taxes 1.8 1.3 1.5 Net income 4.8 4.6 5.4 Net loss attributable to noncontrolling interest, net of tax (2) — — — Net income attributable to CRA International, Inc. 4.8 % 4.6 % 5.4 % _______________________________ (1) Percentage calculates to less than 0.1% for fiscal 2020. (2) Percentage calculates to less than 0.1% for fiscal 2018. Fiscal 2020 Compared to 2019 Our fiscal year end is the Saturday nearest December 31 of each year. Our fiscal years periodically contain 53 weeks rather than 52 weeks. Fiscal 2020 was a 53-week year, and fiscal 2019 was a 52-week year. Revenues. Revenues increased by $57.0 million, or 12.6%, to $508.4 million for fiscal 2020 from $451.4 million for fiscal 2019. The increase in net revenue was a result of an increase in gross revenues of $56.0 million as compared to fiscal 2019, coupled with a decrease in write-offs and reserves of $1.0 million as compared to fiscal 2019. The increase in net revenue is also attributable to the inclusion of 53 weeks in fiscal 2020 as compared to 52 weeks in fiscal 2019. Utilization decreased to 69% for fiscal 2020 from 75% for fiscal 2019, while consultant headcount increased by 52 consultants during fiscal 2020. Billable hours increased by 9.4% for fiscal 2020 when compared to fiscal 2019. Included in revenues are the effect of changes in currency exchange rates resulting in an increase to revenue of $0.5 million for fiscal 2020 and a decrease of $3.9 million for fiscal 2019. Overall, revenues outside of the U.S. represented approximately 20% and 21% of total revenues for fiscal 2020 and fiscal 2019, respectively. Revenues derived from fixed-price engagements remained flat at 24% of total revenues for fiscal 2020 and fiscal 2019. Revenues derived from time-and-materials engagements also remained flat at 76% of total revenues for fiscal 2020 and fiscal 2019. The percentages of revenue derived from fixed-price engagements depends largely on the proportion of our revenues derived from our management consulting business, as the management consulting business typically has a higher concentration of fixed-price service engagements. 26 Table of Contents Costs of Services (exclusive of depreciation and amortization). Costs of services (exclusive of depreciation and amortization) increased by $52.9 million, or 16.7%, to $370.7 million for fiscal 2020 from $317.8 million for fiscal 2019. The increase in costs of services was due primarily to an increase of $23.1 million in employee compensation and fringe benefit costs attributable to salaries and benefits associated with our increased consulting headcount, an increase in forgivable loan amortization of $4.2 million, an increase in incentive and retention compensation costs of $20.2 million, and an increase in other compensation of $1.8 million. Additionally, client reimbursable expenses increased by $6.8 million in fiscal 2020 compared to fiscal 2019. The increase in costs of services is also attributable to the inclusion of 53 weeks in fiscal 2020 as compared to 52 weeks in fiscal 2019. These increases were partially offset by a decrease in stock compensation expense of $0.8 million and a decrease in expense related to contingent consideration of $2.4 million. As a percentage of net revenue, costs of services increased to 72.9% for fiscal 2020 as compared to 70.4% for fiscal 2019. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $3.6 million, or 3.8%, to $90.0 million for fiscal 2020 from $93.6 million for fiscal 2019. This decrease was due primarily to a decrease in travel and entertainment expenses of $7.0 million, a decrease in legal and professional services of $2.4 million, a decrease in training and marketing expenses of $0.9 million, and a $0.2 million decrease in other operating expenses. These decreases were partially offset by a $3.7 million increase in rent expense due to a full year of rent for additional leased space in our Boston, New York, and Oakland offices in fiscal 2020, an increase in software subscription and data services of $1.3 million, and a $2.1 million increase to employee and incentive compensation. Commissions to our non-employee experts experienced a decrease of $0.2 million. The decrease in selling, general and administrative expenses was partially offset by the inclusion of 53 weeks in fiscal 2020 as compared to 52 weeks in 2019. As a percentage of revenues, selling, general and administrative expenses decreased to 17.7% for fiscal 2020 from 20.7% for fiscal 2019 due primarily to the increase in revenues and reduction in travel and entertainment costs. Commissions to non-employee experts decreased to 2.5% of revenue in fiscal 2020 compared to 2.8% of revenue in fiscal 2019. Provision for Income Taxes. For fiscal 2020, our income tax provision was $9.1 million and the effective tax rate ("ETR") was 27.1%, as compared to a provision of $6.1 million and an effective tax rate of 22.6% for fiscal 2019. The effective tax rate for fiscal 2020 was higher than the prior year due to a decrease in the tax benefit related to share-based compensation and the release of tax reserves recorded in the prior year that did not recur in the current year. Partially offsetting this increase was a decrease in non-deductible meals and entertainment. The ETR for fiscal 2020 was comparable to our combined federal and state statutory rate but included offsets of non-deductible compensation paid to executive officers and the tax benefit related to shared based compensation. The ETR for fiscal 2019 was lower than our combined federal and state statutory rate primarily due to the tax benefit on share-based compensation and the reversal of tax reserves as a result of expiration of statutes of limitation. This was partially offset by non-deductible items resulting from limitations on the deductibility of compensation paid to executive officers and the deductibility of meals and entertainment. Net Income Attributable to CRA International, Inc. Net income attributable to CRA International, Inc. increased by $3.8 million to net income of $24.5 million for fiscal 2020 from net income of $20.7 million for fiscal 2019. The diluted net income per share was $3.07 per share for fiscal 2020, compared to diluted net income per share of $2.53 per share for fiscal 2019. Diluted weighted average shares outstanding decreased by approximately 219,000 shares to approximately 7,948,000 shares for fiscal 2020 from approximately 8,167,000 shares for fiscal 2019. The decrease in diluted weighted average shares outstanding was primarily due to the repurchase of shares of our common stock since December 28, 2019, offset in part by the issuance or vesting of shares of restricted stock and time-vesting restricted stock units, and the exercise of stock options. Liquidity and Capital Resources We believe that current cash, cash equivalents, cash generated from operations, and amounts available under our revolving credit facility will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 12 months. As of January 2, 2021, we have $45.7 million of cash and cash equivalents and $120.3 million of borrowing capacity under our 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 and to support our long-term liquidity needs as well. General. In fiscal 2020, our cash and cash equivalents increased by $20.1 million, completing the year with cash and cash equivalents of $45.7 million. The principal drivers of the increase of cash were strong collections of accounts receivable and reduced selling, general and administrative expenses. 27 Table of Contents During fiscal 2020, working capital (defined as current assets less current liabilities) increased by $7.1 million to end fiscal 2020 at $19.8 million. The increase in working capital was principally due to an increase in cash and cash equivalents of $20.1 million, an increase in accounts receivable and unbilled services of $8.1 million, an increase in the current portion of forgivable loans of $7.9 million, and a decrease in accounts payable of $6.7 million. Partially offsetting these increases in working capital was an increase in accrued expenses of $15.1 million, an increase in deferred revenue and other liabilities of $3.2 million, and the reclassification to a current liability of our contingent consideration liability of $14.6 million, which is included in deferred compensation on our consolidated balance sheets. At the conclusion of the measurement period in January 2021, the contingent consideration obligation was $15.0 million. In February 2021, we paid the contingent consideration. At January 2, 2021, $11.5 million of our cash and cash equivalents were held within the U.S. We have sufficient sources of liquidity in the U.S., including cash flow from operations and availability on our revolving line of credit, to fund U.S. operations without the need to repatriate funds from our foreign subsidiaries. As of January 2, 2021, CRA's cash accounts were concentrated at two financial institutions, which potentially exposes CRA to credit risks. The financial institutions both have short-term credit ratings of A-2 by Standard & Poor's ratings services. CRA has not experienced any losses related to such accounts. CRA does not believe that there is significant risk of non-performance by the financial institutions, and its cash on deposit is fully liquid. From time to time, CRA also makes investments in treasury money market mutual fund shares with a credit rating of AAA by Moody's. CRA continually monitors the credit ratings of these institutions. Sources and Uses of Cash. During fiscal 2020, net cash provided by operations was $54.7 million. Net income was $24.5 million for fiscal 2020. Cash provided by operations includes the non-cash items of depreciation and amortization expense of $12.8 million, share-based compensation expenses of $3.2 million, deferred income taxes of $1.1 million, and right-of-use asset amortization of $12.0 million. Sources of cash were an increase in accounts payable, accrued expenses, and other liabilities of $25.3 million, a decrease in prepaid expenses and other current assets of $1.4 million, and an increase in incentive cash awards of $6.6 million. Offsetting these sources of cash were an increase in accounts receivable of $2.4 million, an increase of unbilled services of $3.9 million, a decrease in lease liabilities of $10.5 million, and an increase in forgivable loans of $15.9 million. The change in forgivable loans was primarily driven by $42.4 million of forgivable loan issuances, net of repayments, offset by $26.5 million of forgivable loan amortization netted with the effects of foreign currency translation. During fiscal 2020, net cash used in investing activities was $17.1 million for capital expenditures, which were primarily used to build out our Oakland, New York, and Toronto office spaces. We used $19.5 million of net cash in financing activities during fiscal 2020, primarily as a result of $13.4 million of repurchases of our common stock, payment of $7.4 million of cash dividends to shareholders, and tax withholding payments reimbursed by restricted shares of $0.9 million. Offsetting these uses in cash was $2.2 million received upon the issuance of shares of common stock related to the exercise of stock options. Lease Commitments We are a lessee under certain operating leases for office space and equipment, which have remaining lease terms between one and approximately eleven years, many of which include one or more options to extend the term for periods up to five years for each option. The maturities of lease liabilities, as of January 2, 2021, related to office space and equipment are discussed in Note 4 in our Notes to Consolidated Financial Statements. We have no additional operating leases we have committed to that have not yet commenced. Certain of our operating leases have terms that impose asset retirement obligations due to office modifications or the periodic redecoration of the premises, which are included in facility-related liabilities on our consolidated balance sheets and are recorded at a value based on their estimated discounted cash flows. Redecoration costs under these lease obligations are estimated to be approximately $0.3 million over the next twelve months. The remainder of our asset retirement obligations and redecoration obligations are approximately $3.5 million and are expected to be settled between fiscal 2026 and fiscal 2031 when the underlying leases terminate. We expect to satisfy these lease and related obligations, as they become due, from cash generated from operations. Indebtedness We are party to a $175.0 million revolving credit facility, which reflects an increase on January 12, 2021 to the capacity of the revolving credit facility by $50.0 million and includes a $15.0 million sublimit for the issuance of letters of credit. We may use the proceeds of the revolving credit facility for working capital and other general corporate purposes. Generally, we may repay borrowings under the revolving credit facility at any time but must repay all borrowings no later than October 24, 2022. There were no borrowings outstanding under this revolving credit facility as of January 2, 2021. 28 Table of Contents The amount available under this revolving credit facility was reduced by $4.7 million of letters of credit outstanding as of January 2, 2021. 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 $39.4 million in net assets as of January 2, 2021. 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. At January 2, 2021 and currently, we are in compliance with all such tests under the credit agreement. Forgivable Loans In order to attract and retain highly skilled professionals, we may issue forgivable loans or term loans to employees and non-employee experts. A portion of these loans is collateralized by key person life insurance. The forgivable loans have terms that are generally between one 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 performance awards to certain of our non-employee experts and employees that are payable if specific performance targets are met. These financial targets may include a measure of revenue generation, profitability, or both. The amounts of the awards to be paid under these compensation arrangements could fluctuate depending on future performance during the applicable measurement periods. Changes in the estimated awards are expensed prospectively over the remaining service period. We believe that we will have sufficient funds to satisfy any cash obligations related to the performance awards. We expect to fund any cash payments from existing cash resources, cash generated from operations, or borrowings on our revolving credit facility. We have an active equity incentive plan. Our Amended and Restated 2006 Equity Incentive Plan, as amended (the "2006 Equity Plan"), authorizes the grant of a variety of incentive and performance equity awards to our directors, employees and non-employee experts, including stock options, shares of restricted stock, restricted stock units, and other equity awards. In 2009, the compensation committee of our Board of Directors adopted our long-term incentive program, or "LTIP," as a framework for equity grants made under our 2006 equity incentive plan to our senior corporate leaders, practice leaders, and key revenue generators. The equity awards granted under the LTIP include stock options, time-vesting restricted stock units, and performance-vesting restricted stock units. In December 2016, our compensation committee modified the long-term incentive program, or "LTIP," to allow grants of service- and performance-based cash awards in lieu of, or in addition to, equity awards to our senior corporate leaders, practice leaders, and key revenue generators. The compensation committee of our Board of Directors is responsible for approving all cash and equity awards under the LTIP. Under our cash incentive plan, we expect to pay LTIP cash awards of approximately $6.8 million over the next twelve months and $13.3 million between fiscal 2022 and fiscal 2025. We expect to fund any cash payments from existing cash resources, cash generated from operations, or borrowings on our revolving credit facility. Business Acquisition As part of our business, we regularly evaluate opportunities to acquire other consulting firms, practices or groups, or other businesses. In recent years, we have typically paid for acquisitions with cash, or a combination of cash and our common 29 Table of Contents stock, and we may continue to do so in the future. To pay for an acquisition, we may use cash on hand, cash generated from our operations, borrowings under our revolving credit facility, or we may pursue other forms of financing. Our ability to secure short-term and long-term debt or equity financing in the future, including our ability to refinance our credit 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. Share Repurchases In February 2021 and February 2020, our Board of Directors authorized an expansion to our existing share repurchase program, authorizing the purchase of an additional $40.0 million and $20.0 million, respectively, 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 fiscal 2020, we repurchased and retired 283,842 shares, under our share repurchase program at an average price per share of $47.14. We had approximately $10.1 million available for future repurchases under our share repurchase program as of January 2, 2021. As of February 26, 2021, we had approximately $42.1 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. We expect to continue to repurchase shares under our share repurchase program. Dividends to Shareholders We anticipate paying regular quarterly dividends each year. These dividends are anticipated to be funded through cash flow from operations, available cash on hand, and/or borrowings under our revolving credit facility. Although we anticipate paying regular quarterly dividends on our common stock for the foreseeable future, the declaration, timing and amounts of any such dividends remain subject to the discretion of our Board of Directors. During the fiscal years ended January 2, 2021, December 28, 2019, and December 29, 2018, we paid dividends of $7.5 million, $6.8 million, and $6.0 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: • 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 from 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. 30 Table of Contents 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, 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, could involve 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, 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 Item 1A of this annual 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 annual 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.