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 ("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 September 30, 2023 remain unchanged from December 31, 2022. 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 31, 2022, filed with the SEC on March 2, 2023 (the "2022 Form 10-K") for details on these critical accounting policies. Recent Accounting Standards There are no recent accounting standards that impact the unaudited condensed consolidated financial statements. Results of Operations—For the Fiscal Quarter and Fiscal Year-to-Date Period Ended September 30, 2023, Compared to the Fiscal Quarter and Fiscal Year-to-Date Period Ended October 1, 2022 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 30, 2023 October 1, 2022 September 30, 2023 October 1, 2022 Revenues 100.0 % 100.0 % 100.0 % 100.0 % Costs of services (exclusive of depreciation and amortization) 71.8 68.9 70.7 69.4 Selling, general and administrative expenses 18.9 19.0 18.6 18.4 Depreciation and amortization 2.0 2.0 1.9 2.0 Income from operations 7.3 10.0 8.7 10.2 Interest expense, net (0.7) (0.4) (0.7) (0.3) Foreign currency gains (losses), net 0.5 1.1 (0.1) 0.8 Income before provision for income taxes 7.1 10.7 7.9 10.7 Provision for income taxes 1.3 2.7 2.1 2.9 Net income 5.8 % 8.0 % 5.8 % 7.8 % 18 Table of Contents Fiscal Quarter Ended September 30, 2023, Compared to the Fiscal Quarter Ended October 1, 2022 Revenues. Revenues decreased by $0.8 million, or 0.6%, to $147.6 million for the third quarter of fiscal 2023 from $148.4 million for the third quarter of fiscal 2022. Utilization decreased to 66% for the third quarter of fiscal 2023 from 74% for the third quarter of fiscal 2022, while consultant headcount grew 11.3% from 911 at the end of the third quarter of fiscal 2022 to 1,014 at the end of the third quarter of fiscal 2023. Overall, revenues outside of the U.S. represented approximately 20% and 18% of net revenues for the third quarters of fiscal 2023 and fiscal 2022, respectively. Revenues derived from fixed-price projects increased to 18% of net revenues for the third quarter of fiscal 2023 compared with 16% of net revenues for the third quarter of fiscal 2022. 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 $3.6 million, or 3.5%, to $105.9 million for the third quarter of fiscal 2023 from $102.3 million for the third quarter of fiscal 2022. The increase in costs of services was due to an increase in client reimbursable expenses of $2.9 million, an increase in employee compensation and fringe benefit costs of $0.7 million primarily as a result of a higher headcount, partially offset by a decrease in forgivable loan amortization of $0.1 million. As a percentage of revenues, costs of services (exclusive of depreciation and amortization) increased to 71.8% for the third quarter of fiscal 2023 from 68.9% for the third quarter of fiscal 2022. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $0.3 million, or 1.2%, to $27.9 million for the third quarter of fiscal 2023 from $28.2 million for the third quarter of fiscal 2022. Within this category of expenses, there was a $1.2 million decrease in commissions to our non-employee experts and a $0.4 million decrease in employee compensation and fringe benefit costs. Partially offsetting the decrease in these expenses was a $0.2 million increase in rent expense, a $0.2 million increase in travel and entertainment, a $0.2 million increase in bad debt expense, a $0.5 million increase in miscellaneous and other fees, and a $0.2 million increase in software subscription and data services for the third quarter of fiscal 2023 as compared to the third quarter of fiscal 2022. As a percentage of revenues, selling, general and administrative expenses decreased to 18.9% for the third quarter of fiscal 2023 from 19.0% for the third quarter of fiscal 2022. Commissions to our non-employee experts decreased to 2.4% of revenues for the third quarter of fiscal 2023 compared to 3.2% of revenues the third quarter of fiscal 2022. Provision for Income Taxes. The income tax provision was $1.9 million and the effective tax rate ("ETR") was 18.3% for the third quarter of fiscal 2023 compared to $4.0 million and 25.3% for the third quarter of fiscal 2022. The ETR for the current fiscal quarter was lower than the prior year fiscal quarter primarily due to the release of a valuation allowance in a foreign jurisdiction, partially offset by a decrease in the tax benefit related to share-based compensation, an increase in nondeductible meals and entertainment expenses, and an increase in the U.K. statutory rate from 19% to 25% effective April 1, 2023 with a blended rate of 23.5% for the fiscal year. The increase in the tax impact of the meals expense is a result of the expiration of the relief provided by The Consolidated Appropriations Act, 2021, whereby the deduction for business meals from restaurants was 100% during 2021 and 2022 and reverted back to 50% in 2023. The ETR for the third quarter of fiscal 2023 was lower than the combined federal and state statutory tax rate primarily due to the same items noted above. The ETR for the third quarter of fiscal 2022 was lower than the combined federal and state statutory tax rate primarily due to the tax benefit related to share-based compensation, partially offset by non-deductible compensation paid to executive officers. Net Income. Net income decreased to $8.6 million for the third quarter of fiscal 2023 from $11.9 million for the third quarter of fiscal 2022. The net income per diluted share was $1.21 per share for the third quarter of fiscal 2023, compared to $1.63 of net income per diluted share for the third quarter of fiscal 2022. Weighted average diluted shares outstanding decreased by approximately 163,000 shares to approximately 7,083,000 shares for the third quarter of fiscal 2023 from approximately 7,246,000 shares for the third quarter of fiscal 2022. The decrease in weighted average diluted shares outstanding was primarily due to the repurchase of shares of our common stock since October 1, 2022, offset in part by the vesting of shares of restricted stock and time-vesting restricted stock units and the exercise of stock options since October 1, 2022. 19 Table of Contents Fiscal Year-to-Date Period Ended September 30, 2023, Compared to the Fiscal Year-to-Date Period Ended October 1, 2022 Revenues. Revenues increased by $16.5 million, or 3.7%, to $462.4 million for the fiscal year-to-date period ended September 30, 2023 from $445.9 million for the fiscal year-to-date period ended October 1, 2022. Utilization decreased to 69% for the fiscal year-to-date period ended September 30, 2023 from 75% for the fiscal year-to-date period ended October 1, 2022, while consultant headcount increased 11.3% from 911 at the end of the third quarter of fiscal 2022 to 1,014 at the end of the third quarter of fiscal 2023. Overall, revenues outside of the U.S. represented approximately 22% and 20% of net revenues for the fiscal year-to-date periods ended September 30, 2023 and October 1, 2022, respectively. Revenues derived from fixed-price projects remained flat at 18% of net revenues for the fiscal year-to-date periods ended September 30, 2023 and October 1, 2022. 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 $17.7 million, or 5.7%, to $327.1 million for the fiscal year-to-date period ended September 30, 2023 from $309.4 million for the fiscal year-to-date period ended October 1, 2022. The increase in costs of services was due to an increase of $13.8 million in employee compensation and fringe benefit costs primarily as a result of a higher headcount, an increase in forgivable loan amortization of $2.3 million, and an increase in client reimbursable expenses of $1.5 million. As a percentage of revenues, costs of services (exclusive of depreciation and amortization) increased to 70.7% for the fiscal year-to-date period ended September 30, 2023 from 69.4% for the fiscal year-to-date period ended October 1, 2022. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $4.1 million, or 5.0%, to $86.1 million for the fiscal year-to-date period ended September 30, 2023 from $82.0 million for the fiscal year-to-date period ended October 1, 2022. Within this category of expenses, there was a $2.2 million increase in travel and entertainment, a $1.5 million increase in rent expense, a $1.1 million increase in software subscription and data services, a $0.8 million increase in bad debt expense, a $0.8 million increase in training and marketing expenses, $0.7 million increase in employee compensation and fringe benefit costs, and a $0.6 million increase in miscellaneous and other costs. Partially offsetting the increase in these expenses was a $3.6 million decrease in commissions to our non-employee experts for the fiscal year-to-date period ended September 30, 2023 as compared to the fiscal year-to-date period ended October 1, 2022. As a percentage of revenues, selling, general and administrative expenses increased to 18.6% for the fiscal year-to-date period ended September 30, 2023 from 18.4% for the fiscal year-to-date period ended October 1, 2022. Commissions to our non-employee experts decreased to 2.4% of revenues for the fiscal year-to-date period ended September 30, 2023 compared to 3.3% of revenues for the fiscal year-to-date period ended October 1, 2022. Provision for Income Taxes. The income tax provision was $9.7 million and the ETR was 26.4% for the fiscal year-to-date period ended September 30, 2023, compared to $12.7 million and 26.7% for the fiscal year-to-date period ended October 1, 2022. The ETR for the current fiscal year-to-date period was lower than the prior fiscal year-to-date period primarily due to the release of a valuation allowance in a foreign jurisdiction, partially offset by a decrease in the tax benefit related to share-based compensation, an increase in nondeductible meals and entertainment expenses, and an increase in the U.K. statutory rate from 19% to 25% effective April 1, 2023 with a blended rate of 23.5% for the fiscal year. The increase in the tax impact of the meals expense is a result of the expiration of the relief provided by The Consolidated Appropriations Act, 2021, whereby the deduction for business meals from restaurants was 100% during 2021 and 2022 and reverted back to 50% in 2023. The ETR for the current fiscal year-to-date period was approximately the same as the combined federal and state statutory tax rate and included offsetting items related to the release of a valuation allowance in a foreign jurisdiction, the tax benefit for share-based compensation, nondeductible meals and entertainment expenses, and nondeductible compensation paid to executive officers. The ETR for the fiscal year-to-date period ended October 1, 2022 was approximately the same as the combined federal and state statutory tax rate and included offsetting items primarily related to the tax benefit for share-based compensation and nondeductible compensation paid to executive officers. Net Income. Net income decreased by $7.9 million to $27.0 million for the fiscal year-to-date period ended September 30, 2023 from $34.9 million for the fiscal year-to-date period ended October 1, 2022. The diluted net income per share was $3.78 for the fiscal year-to-date period ended September 30, 2023, compared to diluted net income per share of $4.72 for the fiscal year-to-date period ended October 1, 2022. Weighted average diluted shares outstanding decreased by approximately 238,000 to approximately 7,138,000 shares for the fiscal year-to-date period ended September 30, 2023 from approximately 7,376,000 shares for the fiscal year-to-date period ended October 1, 2022. The decrease in weighted average diluted shares outstanding was primarily due to the repurchase of shares of our common stock since October 1, 2022, offset in 20 Table of Contents part by the vesting of restricted stock and time-vesting restricted stock units and the exercise of stock options since October 1, 2022. Liquidity and Capital Resources Fiscal Year-to-Date Period Ended September 30, 2023 We believe that our current cash and 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 September 30, 2023, cash and cash equivalents decreased by $3.8 million. We completed the period with cash and cash equivalents of $27.6 million. The principal drivers of the decrease of cash and cash equivalents were payment of a significant portion of our fiscal 2022 performance bonuses in the first and second quarters of fiscal 2023, the repurchase of shares, and the payment of dividends, offset by net borrowings of $32.0 million. During the fiscal year-to-date period ended September 30, 2023, working capital (defined as current assets less current liabilities) decreased by $7.3 million to $24.5 million. The decrease in working capital was principally due to an increase in borrowings of $32.0 million, a decrease in cash and cash equivalents of $3.8 million, and a decrease in accounts receivable and unbilled services of $1.7 million. Partially offsetting these decreases to working capital was a decrease in accrued expenses of $17.9 million, a decrease in deferred revenue and other liabilities of $4.1 million, a decrease in accounts payable of $2.9 million, an increase in prepaid expenses and other current assets of $4.6 million, an increase in the current portion of our forgivable loans of $0.8 million, and a decrease in the current portion of deferred compensation of $0.1 million. At September 30, 2023, $3.0 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 September 30, 2023, net cash used in operating activities was $0.1 million. Net income was $27.0 million for the fiscal year-to-date period ended September 30, 2023. Uses of cash for operating activities included a $13.2 million decrease in lease liabilities and a $4.0 million increase in prepaid expenses and other current assets. Other uses of cash included a decrease in accounts payable, accrued expenses, and other liabilities of $36.8 million, primarily due to the payment of a significant portion of our fiscal 2022 performance bonuses and performance awards, and an increase in forgivable loans for the period of $2.3 million, which was primarily driven by $20.7 million of forgivable loan issuances, net of repayments, offset by $18.4 million of forgivable loan amortization, partially offsetting these uses of cash was a net decrease of $1.6 million in accounts receivable and unbilled receivables. Cash used in operations included incentive cash award expense of $6.1 million, non-cash depreciation and amortization expense of $8.8 million, right-of-use amortization of $10.6 million, and share-based compensation expenses of $3.0 million. During the fiscal year-to-date period ended September 30, 2023, net cash used in investing activities was $2.6 million, which included $2.0 million for capital expenditures, primarily related to purchases of computer equipment, and $0.6 million of net consideration paid for the acquisitions of Welch Consulting and bSG. During the fiscal year-to-date period ended September 30, 2023, net cash used in financing activities was $1.4 million, primarily as a result of net borrowings under the revolving credit facility of $32.0 million. Offsetting these increases in cash provided by financing activities were repurchases of common stock of $23.6 million, payment of cash dividends of $7.8 million, and tax withholding payments reimbursed by restricted shares on vesting of $2.0 million. 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 other liabilities on our condensed consolidated balance sheets and are recorded at a value based on their estimated discounted cash flows. At September 30, 2023, we expect to incur asset retirement obligation or redecoration obligation costs over the next twelve months of $0.1 million. The remainder of our asset retirement obligations and redecoration obligations are approximately $2.7 million and are expected to be paid between fiscal year 2026 and fiscal year 2031 when the underlying leases terminate or when the respective lease agreement requires redecoration. We expect to satisfy these lease and related obligations as they become due from cash generated from operations. 21 Table of Contents Indebtedness CRA is party to a Credit Agreement, dated as of August 19, 2022 (the "Credit Agreement") with Bank of America, N.A., as swingline lender, a letter of credit issuing bank and administrative agent, and with Citizens Bank, N.A., as a letter of credit issuing bank. The Credit Agreement provides CRA with a $250.0 million revolving credit facility, which may be decreased at CRA's option to $200.0 million during the period from July 16th in a year through January 15th in the next year. Additionally, for the period from January 16th to July 15th of each calendar year, CRA may elect to not increase the revolving credit facility to $250.0 million. The revolving credit facility includes a $25.0 million sublimit for the issuance of letters of credit. There was $32.0 million in borrowings outstanding under the revolving credit facility as of September 30, 2023 and no borrowings outstanding as of December 31, 2022. As of September 30, 2023, the amount available under the revolving credit facility was reduced by certain letters of credit outstanding, which amounted to $4.5 million. We may use the proceeds of the revolving credit loans under the Credit Agreement for general corporate purposes and may repay any borrowings under the revolving credit facility at any time, but any borrowings must be repaid no later than August 19, 2027. Borrowings under the revolving credit facility bear interest at a rate per annum equal to one of the following rates, at our election, plus an applicable margin as described below: (i) in the case of borrowings in U.S. dollars by us, the Base Rate (as defined in the Credit Agreement), (ii) in the case of borrowings in U.S. dollars, a rate based on Term SOFR (as defined in the Credit Agreement) for the applicable interest period, (iii) in the case of borrowings in Euros, EURIBOR (as defined in the Credit Agreement) for the applicable interest period, (iv) in the case of borrowings in Pounds Sterling, a daily rate based on SONIA (as defined in the Credit Agreement), (v) in the case of borrowings in Canadian Dollars, CDOR (as defined in the Credit Agreement) for the applicable interest period, (vi) in the case of borrowings in Swiss Francs, a daily rate based on SARON (as defined in the Credit Agreement), or (vii) in the case of borrowings in any other Alternate Currency (as defined in the Credit Agreement), the relevant daily or term rate determined as provided in the Credit Agreement. The applicable margin on borrowings based on the Base Rate varies within a range of 0.25% to 1.00% depending on our consolidated net leverage ratio, and the applicable margin on borrowings based on any of the other rates described above varies within a range of 1.25% to 2.00% depending on our consolidated net leverage ratio. We are required to pay a fee on the amount available to be drawn under any letter of credit issued under the revolving credit facility at a rate per annum that varies between 1.25% and 2.00% depending on our consolidated net leverage ratio. In addition, we are required to pay a fee on the unused portion of the revolving credit facility at a rate per annum that varies between 0.175% and 0.250% depending on our consolidated net leverage ratio. Under the Credit Agreement, CRA must comply with various financial and non-financial covenants. The primary financial covenants consist of a maximum consolidated net leverage ratio of 3.0 to 1 and a minimum consolidated interest coverage ratio of 2.5 to 1. The primary non-financial covenants include, but are not limited to, restrictions on CRA's ability to incur future indebtedness, engage in acquisitions or dispositions, pay dividends or repurchase capital stock, and enter into business combinations. Any indebtedness outstanding under the revolving credit facility may become immediately due upon the occurrence of stated events of default, including CRA's failure to pay principal, interest or fees, or upon the breach of any covenant. As of September 30, 2023, CRA was in compliance with the covenants of 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 two and six 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. 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 available on our revolving credit facility. 22 Table of Contents 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. At the annual meeting of our shareholders held on July 13, 2023, our shareholders approved amendments to our Amended and Restated 2006 Equity Incentive Plan (as so amended, the “Plan”) which, among other things, (i) increased the maximum number of shares issuable under the Plan by 500,000 shares of our common stock, no par value, (ii) limited the term of any stock appreciation right to ten years, (iii) made other minor revisions to further clarify the terms of the Plan and (iv) included certain amendments to the French Sub-plan which is part of the Plan. In 2009, the compensation committee of our Board of Directors adopted our long-term incentive program, (the "LTIP"), as a framework for equity grants made under our 2006 Equity 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 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 available under 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 available 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. We completed two business acquisitions during the first and fourth quarters of fiscal 2022, which are further described in Note 2, "Business Acquisitions” in Part I, Item I, “Financial Statements” of this report. Share Repurchases In March 2023, we announced that our Board of Directors authorized an expansion of our existing share repurchase program 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 ended September 30, 2023, we did not repurchase any shares under this share repurchase program. For the fiscal year-to-date period ended September 30, 2023, we repurchased and retired 211,971 shares under our share repurchase program at an average price per share of $111.23. During the fiscal quarter and fiscal year-to-date period ended October 1, 2022, we repurchased and retired 51,524 shares and 319,534 shares under our share repurchase program at an average price per share of $97.04 and $86.47, respectively. As of September 30, 2023, we had approximately $19.3 million available for future repurchases under our share repurchase program. We plan to finance future repurchases with available cash, cash from future operations, and borrowings available under 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 available 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 September 30, 2023, we paid dividends and dividend equivalents of $2.5 million and $7.8 million, respectively. During the fiscal quarter and fiscal year-to-date period ended October 1, 2022, we paid dividends and dividend equivalents of $2.2 million and $6.9 million, respectively. 23 Table of Contents 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. 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 Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this report, 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 2022 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. 24 Table of Contents ITEM 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in our exposure to market risk during the fiscal quarter ended September 30, 2023. For information regarding our exposure to certain market risks, see Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk” of our 2022 Form 10-K.