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. Critical Accounting Policies and Estimates Our critical accounting policies involving the more significant estimates and judgments used in the preparation of our financial statements as of October 2, 2021 remain unchanged from January 2, 2021. 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 January 2, 2021, filed with the Securities and Exchange Commission on March 4, 2021 (the "2020 Form 10-K") for details on these critical accounting policies. Recent Accounting Standards Please refer to the sections captioned “Recent Accounting Standards Adopted” included in Note 1, “Summary of Significant Accounting Policies” in Part I, Item I, “Financial Statements” of this report. Results of Operations—For the Fiscal Quarter and Fiscal Year-to-Date Period Ended October 2, 2021, Compared to the Fiscal Quarter and Fiscal Year-to-Date Period Ended September 26, 2020 The following table provides operating information as a percentage of revenues for the periods indicated: Fiscal Quarter Ended Fiscal Year-to-Date Period Ended October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 Revenues 100.0 % 100.0 % 100.0 % 100.0 % Costs of services (exclusive of depreciation and amortization) 70.4 72.5 71.1 72.6 Selling, general and administrative expenses 18.0 18.2 16.6 18.3 Depreciation and amortization 2.3 2.7 2.2 2.5 Income from operations 9.4 6.6 10.1 6.6 Interest expense, net (0.1) (0.2) (0.2) (0.3) Foreign currency gains (losses), net 0.2 (0.2) (0.1) 0.3 Income before provision for income taxes 9.4 6.2 9.8 6.6 Provision for income taxes 1.4 1.7 2.2 1.8 Net income 8.0 % 4.4 % 7.7 % 4.8 % 17 Table of Contents Fiscal Quarter Ended October 2, 2021, Compared to the Fiscal Quarter Ended September 26, 2020 Revenues. Revenues increased by $14.6 million, or 12.0%, to $136.4 million for the third quarter of fiscal 2021 from $121.8 million for the third quarter of fiscal 2020. The increase in net revenue was a result of an increase in gross revenues of $13.7 million as compared to the third quarter of fiscal 2020, as well as a decrease in write-offs and reserves of $0.9 million compared to the third quarter of fiscal 2020. Utilization increased to 73% for the third quarter of fiscal 2021 from 69% for the third quarter of fiscal 2020, while consultant headcount grew 6.8% from 826 at the end of the third quarter of fiscal 2020 to 882 at the end of the third quarter of fiscal 2021. Overall, revenues outside of the U.S. represented approximately 20% and 21% of net revenues for the third quarters of fiscal 2021 and fiscal 2020, respectively. Revenues derived from fixed-price projects increased to 23% of net revenues for the third quarter of fiscal 2021 compared with 22% of net revenue for the third quarter of fiscal 2020. 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 $7.7 million, or 8.7%, to $96.0 million for the third quarter of fiscal 2021 from $88.3 million for the third quarter of fiscal 2020. The increase in costs of services was due primarily to an increase of $3.0 million in employee compensation and fringe benefit costs attributable to our increased consultant headcount, an increase in incentive and retention compensation costs of $2.3 million, and an increase in forgivable loan amortization of $0.7 million, partially offset by a decrease in the valuation expense of the contingent consideration of $0.9 million. Additionally, client reimbursable expenses increased by $2.6 million in the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020. As a percentage of revenues, costs of services (exclusive of depreciation and amortization) decreased to 70.4% for the third quarter of fiscal 2021 from 72.5% for the third quarter of fiscal 2020. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $2.3 million, or 10.3%, to $24.5 million for the third quarter of fiscal 2021 from $22.2 million for the third quarter of fiscal 2020. Within this category of expenses, there was a $0.8 million increase in commissions to our non-employee experts, a $0.4 million increase in employee and incentive compensation, a $0.7 million increase in travel and entertainment, and a $0.6 million increase in miscellaneous and other costs. Partially offsetting the increase in these expenses was a $0.2 million decrease in bad debt expense for the third quarter of fiscal 2021 as compared to the third quarter of fiscal 2020. As a percentage of revenues, selling, general and administrative expenses decreased to 18.0% for the third quarter of fiscal 2021 from 18.2% for the third quarter of fiscal 2020. Commissions to our non-employee experts increased to 3.2% of revenues for the third quarter of fiscal 2021 compared to 3.0% of revenues for the third quarter of fiscal 2020. Provision for Income Taxes. The income tax provision was $1.9 million and the effective tax rate ("ETR") was 14.8% for the third quarter of fiscal 2021 compared to $2.1 million and 28.2% for the third quarter of fiscal 2020. The ETR for the third quarter of fiscal 2021 was lower than the third quarter of fiscal 2020 primarily due to an increase in the tax benefit related to the accounting for stock-based compensation. The ETR for the third quarter of fiscal 2021 was lower than the combined federal and state statutory tax rate due to the tax benefit related to the accounting for stock-based compensation, partially offset by non-deductible items resulting primarily from limitations of compensation paid to executive officers. The ETR for the third quarter of fiscal 2020 was 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, partially offset by the tax benefit related to the accounting for stock-based compensation. Net Income. Net income increased by $5.5 million to $10.9 million for the third quarter of fiscal 2021 from $5.4 million for the third quarter of fiscal 2020. The net income per diluted share was $1.44 per share for the third quarter of fiscal 2021, compared to $0.68 of net income per diluted share for the third quarter of fiscal 2020. Weighted average diluted shares outstanding decreased by approximately 374,000 shares to approximately 7,560,000 shares for the third quarter of fiscal 2021 from approximately 7,934,000 shares for the third quarter of fiscal 2020. The decrease in weighted average diluted shares outstanding was primarily due to the repurchase of shares of our common stock since September 26, 2020, offset in part by the vesting of shares of restricted stock and time-vesting restricted stock units, the issuance of common stock for contingent consideration, and the exercise of stock options since September 26, 2020. 18 Table of Contents Fiscal Year-to-Date Period Ended October 2, 2021, Compared to the Fiscal Year-to-Date Period Ended September 26, 2020 Revenues. Revenues increased by $60.2 million, or 16.2%, to $431.2 million for the fiscal year-to-date period ended October 2, 2021 from $371.0 million for the fiscal year-to-date period ended September 26, 2020. The increase in net revenue was a result of an increase in gross revenues of $61.3 million as compared to the fiscal year-to-date period ended September 26, 2020, partially offset by an increase in write-offs and reserves of $1.1 million as compared to the fiscal year-to-date period ended September 26, 2020. Utilization increased to 75% for the fiscal year-to-date period ended October 2, 2021 from 69% for the fiscal year-to-date period ended September 26, 2020, while consultant headcount grew 6.8% from 826 at the end of the third quarter of fiscal 2020 to 882 at the end of the third quarter of fiscal 2021. Overall, revenues outside of the U.S. represented approximately 19% and 20% of net revenues for the fiscal year-to-date periods ended October 2, 2021 and September 26, 2020, respectively. Revenues derived from fixed-price projects increased to 24% of net revenues for the fiscal year-to-date period ended October 2, 2021 compared with 23% of net revenue for the year-to-date period ended September 26, 2020. 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 $36.9 million, or 13.7%, to $306.4 million for the fiscal year-to-date period ended October 2, 2021 from $269.5 million for the fiscal year-to-date period ended September 26, 2020. The increase in costs of services was due primarily to an increase of $11.0 million in employee compensation and fringe benefit costs associated with our increased consulting headcount, an increase in incentive and retention compensation costs of $20.8 million, and an increase in forgivable loan amortization of $1.9 million, partially offset by a decrease in expense related to other compensation of $0.3 million and a decrease in the valuation expense of the contingent consideration of $1.5 million. Additionally, client reimbursable expenses increased by $5.0 million in the fiscal year-to-date period ended October 2, 2021 compared to the fiscal year-to-date period ended September 26, 2020. As a percentage of revenues, costs of services (exclusive of depreciation and amortization) decreased to 71.1% for the fiscal year-to-date period ended October 2, 2021 from 72.6% for the fiscal year-to-date period ended September 26, 2020. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $4.0 million, or 5.9%, to $71.7 million for the fiscal year-to-date period ended October 2, 2021 from $67.7 million for the fiscal year-to-date period ended September 26, 2020. Within this category of expenses, there was a $3.5 million increase in commissions to our non-employee experts, a $1.8 million increase in employee and incentive compensation, and a $1.3 million increase in miscellaneous and other costs. Partially offsetting the increase in these expenses was a $0.5 million decrease in travel and entertainment, a $0.5 million decrease in legal and other professional services fees, a $1.4 million decrease in rent expense, and a $0.2 million decrease in bad debt expense for the fiscal year-to-date period ended October 2, 2021 as compared to the fiscal year-to-date period ended September 26, 2020. As a percentage of revenues, selling, general and administrative expenses decreased to 16.6% for the fiscal year-to-date period ended October 2, 2021 from 18.3% for the fiscal year-to-date period ended September 26, 2020. Commissions to our non-employee experts increased to 3.0% of revenues for the fiscal year-to-date period ended October 2, 2021 compared to 2.5% of revenues for the fiscal year-to-date period ended September 26, 2020. Provision for Income Taxes. For the fiscal year-to-date period ended October 2, 2021, our income tax provision was $9.3 million, and the ETR was 22.0%, compared to $6.7 million and 27.5% for the fiscal year-to-date period ended September 26, 2020. The ETR for the current fiscal year-to-date period was lower than the prior year-to-date period primarily due to an increase in the tax benefit related to the accounting for stock-based compensation, partially offset by the enactment of the U.K. statutory tax rate increase during the second fiscal quarter whereby the U.K.'s long-term deferred tax liabilities were remeasured. The ETR in the fiscal year-to-date period ended October 2, 2021 was lower than the combined federal and state statutory tax rate due to the tax benefit related to accounting for stock-based compensation, partially offset by non-deductible items resulting primarily from limitations on the deductibility of compensation paid to executive officers and the impact of the U.K. statutory tax rate change. The ETR for 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. Net Income. Net income increased by $15.2 million to $33.0 million for the fiscal year-to-date period ended October 2, 2021 from $17.8 million for the fiscal year-to-date period ended September 26, 2020. The diluted net income per share was 19 Table of Contents $4.31 for the fiscal year-to-date period ended October 2, 2021, compared to diluted net income per share of $2.23 for the fiscal year-to-date period ended September 26, 2020. Weighted average diluted shares outstanding decreased by approximately 321,000 to approximately 7,643,000 shares for the fiscal year-to-date period ended October 2, 2021 from approximately 7,964,000 shares for the fiscal year-to-date period ended September 26, 2020. The decrease in weighted average diluted shares outstanding was primarily due to the repurchase of shares of our common stock since September 26, 2020, offset in part by the vesting of restricted stock and time-vesting restricted stock units, the issuance of common stock for contingent consideration, and the exercise of stock options since September 26, 2020. Liquidity and Capital Resources Fiscal Year-to-Date Period Ended October 2, 2021 We believe that our 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. General. During the fiscal year-to-date period ended October 2, 2021, cash and cash equivalents decreased by $26.0 million. We completed the period with cash and cash equivalents of $19.7 million. The principal drivers of the reduction of cash were payment of a significant portion of our fiscal 2020 performance bonuses in the first and second fiscal quarters of fiscal 2021, the payment of the contingent consideration liability, the repurchase of shares, and the payment of dividends, offset by net borrowings of $6.0 million. During the fiscal year-to-date period ended October 2, 2021, working capital (defined as current assets less current liabilities) increased by $12.0 million to $31.8 million. The increase in working capital was principally due to an increase in accounts receivable and unbilled services of $21.4 million, a decrease in the current portion of deferred compensation of $16.5 million, and a decrease in accrued expenses of $7.7 million. Partially offsetting these increases to working capital was a decrease in cash and cash equivalents of $26.0 million, a decrease in the current portion of our forgivable loans of $5.1 million, and an increase in borrowings of $6.0 million. At October 2, 2021, $1.8 million of our cash and cash equivalents was 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 credit facility to fund U.S. operations for the next 12 months without the need to repatriate funds from our foreign subsidiaries. Sources and Uses of Cash. During the fiscal year-to-date period ended October 2, 2021, net cash provided by operating activities was $13.9 million. Net income was $33.0 million for the fiscal year-to-date period ended October 2, 2021. Uses of cash for operating activities included a $11.5 million decrease in lease liabilities, a net increase of $22.0 million in accounts receivable and unbilled receivables due primarily to the increase in revenues and the timing of billings, and a $2.9 million increase in prepaid expenses and other current assets primarily related to the timing of renewing annual subscriptions. Other uses of cash included a decrease in accounts payable, accrued expenses, and other liabilities of $17.7 million, primarily due to the payment of a significant portion of our fiscal 2020 performance bonuses and performance awards and the payment of the contingent consideration liability, and a decrease in forgivable loans for the period of $9.3 million, which was primarily driven by $9.6 million of forgivable loan issuances offset by $18.9 million of forgivable loan amortization. Cash provided by operations included incentive cash award expense of $5.0 million, non-cash depreciation and amortization expense of $9.7 million, right-of-use amortization of $9.7 million, share-based compensation expenses of $2.8 million, and other non-cash deductions of $1.5 million. During the fiscal year-to-date period ended October 2, 2021, net cash used in investing activities was $1.7 million for capital expenditures primarily related to purchases of office equipment. During the fiscal year-to-date period ended October 2, 2021, net cash used in financing activities was $37.8 million, primarily as a result of $40.0 million of repurchases of common stock, payment of $5.9 million of cash dividends and dividend equivalents, tax withholding payments reimbursed by restricted shares of $0.6 million, and a portion of the payment of the contingent consideration classified as a financing activity in the amount of $2.4 million. Offsetting these decreases in cash used in financing activities were borrowings, net of repayments, under the revolving credit facility of $6.0 million and $5.0 million received upon the issuance of shares of common stock related to the exercise of stock options. 20 Table of Contents Lease Commitments We are a lessee under certain operating leases for office space and equipment. 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. We expect to satisfy these lease and related obligations, as they become due, from cash generated from operations. Indebtedness We are party to an amended and restated credit agreement that provides us with a $175.0 million revolving credit facility, which reflects an increase to the capacity by $50.0 million per an amendment to the credit agreement on January 12, 2021, and includes 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 $6.0 million in borrowings outstanding under the revolving credit facility as of October 2, 2021. The amount available under the revolving credit facility is reduced by certain letters of credit outstanding, which amounted to $4.2 million as of October 2, 2021. Borrowings under the revolving credit facility bear interest at a rate per annum, at our election, of either (i) the 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 $32.3 million in net assets as of October 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, as defined in the credit agreement, 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 October 2, 2021 and currently, we are in compliance with the covenants of our 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 two and seven 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 employees and non-employee experts that are payable if specific performance targets are met. The 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. 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 performance awards. We expect to fund any cash payments from existing cash resources, cash generated from operations, or borrowings on our revolving credit facility. 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. 21 Table of Contents 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. We expect to fund any cash payments 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, 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 credit facility, and the overall credit and equity market environments. Share Repurchases In February 2021, our Board of Directors authorized an expansion of our existing share repurchase program, authorizing the purchase of an additional $40.0 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. Refer to the section titled "Self-Tender Offer" below for discussion of shares repurchased during the second quarter of fiscal 2021 under our modified "Dutch auction" self-tender offer. During the fiscal quarter and fiscal year-to-date period ended October 2, 2021, we repurchased and retired 53,012 shares and 219,564 shares, respectively, under our share repurchase program at an average price per share of $94.32 and $66.72, respectively. During the fiscal quarter and fiscal year-to-date period 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. As of October 2, 2021, we had approximately $35.5 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. Self-Tender Offer On March 8, 2021, we commenced a modified "Dutch auction" self-tender offer to purchase up to $25.0 million in value of shares of our common stock at a price of not less than $66.25 per share nor greater than $76.00 per share. The self-tender offer expired on April 5, 2021. On April 8, 2021, we paid $25.3 million, including transaction costs, to repurchase 337,837 shares at a purchase price of $74.00 per share. The purchase price and transaction costs were funded from the revolving credit facility and cash on hand. The repurchased shares were retired. 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 quarter and fiscal year-to-date period ended October 2, 2021, we paid dividends and dividend equivalents of $1.9 million and $5.9 million, respectively. During the fiscal quarter and fiscal year-to-date period ended September 26, 2020, we paid dividends and dividend equivalents of $1.8 million and $5.4 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. 22 Table of Contents 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 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; • potential 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, 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 over the next twelve 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 our 2020 Form 10-K. If any of these risks, or any risks not presently known to us or that we currently believe are not significant, develops into an actual event, then our business, financial condition, and results of operations could be adversely affected. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk For information regarding our exposure to certain market risks see Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk,” of our 2020 Form 10-K. 23 Table of Contents