What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-29 compared with 2023-03-02 · 59 added, 70 removed, 228 unchanged (36% of the section changed)

Item 7 —Management's Discussion and Analysis of Financial Condition and Results of Operations

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 January 1, 2022.

Discussion and analysis of year-to-year comparisons between fiscal 2022 and fiscal 2021 not included in this Form 10-K 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 January 1, 2022.

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 31, 2022.

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.

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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 2022, 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.

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.

Due to the above circumstances and as described generally in this Form 10-K, our results of operations for fiscal 2022 are not necessarily indicative of the results to be expected for future fiscal years.

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

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Revenues outside of the U.S.

accounted for approximately 20% of our total revenues in each of fiscal 2022, fiscal 2021, and fiscal 2020, respectively.

accounted for approximately 21% of our total revenues in fiscal 2023 and 20% of our total revenues in both fiscal 2022 and fiscal 2021, respectively.

Revenue by country is detailed in Note 3 to our Notes to Consolidated Financial Statements.

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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.

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Reimbursable expenses, including those relating to travel, out-of-pocket expenses, outside consultants and other third-party vendor expenses, 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.

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 to be included in the transaction price is estimated using the expected value 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.

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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.

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.

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Business Combinations .

We account for business acquisitions using the acquisition method of accounting, which requires assets acquired and liabilities assumed to be measured and recorded at their estimated fair values as of the acquisition date, with certain exceptions.

date, with certain exceptions.

Right-of-use assets and lease liabilities are recorded on the date of acquisition in accordance with ASC Topic 842, Leases .

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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.

We account for uncertainties in income tax positions in accordance with Topic 740, Income Taxes ("ASC Topic 740").

The number of years with open tax audits varies depending on the tax jurisdiction.

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Net income 6.2 % 7.4 % 7.4 %

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(1) Percentage calculates to less than 0.1% for fiscal 2020.

Fiscal 2023 Compared to Fiscal 2022

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Revenues increased by $33.1 million, or 5.6%, to $624.0 million for fiscal 2023 from $590.9 million for fiscal 2022.

Utilization increased to 75% for fiscal 2022 from 74% for fiscal 2021, while consultant headcount increased by 78 consultants during fiscal 2022.

Utilization decreased to 70% for fiscal 2023 from 75% for fiscal 2022, while consultant headcount increased by 65 consultants during fiscal 2023.

Billable hours increased by 4.1% for fiscal 2023 when compared to fiscal 2022.

Overall, revenues outside of the U.S.

represented approximately 20% of net revenues in each of fiscal 2022 and fiscal 2021.

increased to 21% of net revenues for fiscal 2023 from 20% for fiscal 2022.

Revenues derived from fixed-price engagements decreased to 18% of net revenues for fiscal 2023 from 19% for fiscal 2022.

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Costs of services (exclusive of depreciation and amortization) increased by $29.7 million, or 7.2%, to $439.8 million for fiscal 2023 from $410.1 million for fiscal 2022.

The increase in costs of services was due primarily to an increase of $8.5 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 $2.1 million in fiscal 2022 compared to fiscal 2021.

These increases were partially offset by a decrease of $1.2 million of client reimbursable expenses and a decrease of $0.4 million in accretion related to contingent consideration in fiscal 2022 compared to fiscal 2021.

As a percentage of net revenue, costs of services decreased to 69.4% for fiscal 2022 as compared to 70.7% for fiscal 2021.

The increase in costs of services was due primarily to an increase of $26.0 million in employee and incentive compensation attributable to salaries and benefits associated with our increased consulting headcount, an increase in forgivable loan amortization of $2.5 million, and an increase of $1.9 million of client reimbursable expenses in fiscal 2023 compared to fiscal 2022.

These increases were partially offset by a decrease of $0.9 million in expense related to contingent consideration in fiscal 2023 compared to fiscal 2022.

As a percentage of net revenue, costs of services increased to 70.5% for fiscal 2023 as compared to 69.4% for fiscal 2022.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses increased by $5.0 million, or 4.6%, to $115.1 million for fiscal 2023 from $110.1 million for fiscal 2022.

This increase was due primarily to a $2.0 million increase to employee and incentive compensation, a $3.5 million increase in travel and entertainment expenses, a $1.5 million increase in software subscription and data services, a $1.1 million increase in training and marketing expenses, a $1.0 million increase in rent expense, a $1.6 million increase in legal and professional services, and a $0.8 million increase in other operating expenses.

These increases were partially offset by a $0.3 million decrease in bad debt expense.

Commissions to our non-employee experts experienced an increase of $1.5 million.

As a percentage of revenues, selling, general and administrative expenses increased to 18.6% for fiscal 2022 from 17.2% for fiscal 2021.

Commissions to non-employee experts increased to 3.1% of revenue in fiscal 2022 compared to 3.0% of revenues in fiscal 2021.

This increase was due primarily to a $2.7 million increase in travel and entertainment expenses, $1.5 million increase to employee and incentive compensation, a $1.5 million increase in rent expense, a $1.4 million increase in software subscription and data services, a $0.9 million increase in training and marketing expenses, a $0.8 million increase in bad debt expense, and a $0.8 million increase in other operating expenses.

These increases were partially offset by a $0.3 million decrease in legal and professional services.

Commissions to our non-employee experts experienced a decrease of $4.3 million.

As a percentage of revenues, selling, general and administrative expenses decreased to 18.4% for fiscal 2023 from 18.6% for fiscal 2022.

Commissions to non-employee experts decreased to 2.2% of revenue in fiscal 2023 compared to 3.1% of revenues in fiscal 2022.

Provision for Income Taxes.

For fiscal 2023, our income tax provision was $13.8 million and the effective tax rate ("ETR") was 26.4%, as compared to a provision of $15.2 million and an effective tax rate of 25.8% for fiscal 2022.

effective tax rate for fiscal 2022 was higher than the prior year primarily due to a decrease in the tax benefit related to share-based compensation.

The ETR for both fiscal 2022 and 2021 were lower than our combined federal and state statutory rate primarily due to the tax benefit related to shared-based compensation, partially offset by non-deductible compensation paid to executive officers.

Net income increased by $1.9 million to $43.6 million for fiscal 2022 from $41.7 million for fiscal 2021.

The effective tax rate for fiscal 2023 was higher than the prior year primarily due to a decrease in the tax benefit related to share-based compensation, an increase in the U.K.

statutory tax rate, and an increase in non-deductible meals and entertainment expenses, partially offset by the release of a valuation allowance in a foreign jurisdiction.

The ETR for fiscal 2023 was approximately the same as our combined federal and state statutory rate and included offsetting items noted above in addition to nondeductible compensation paid to executive officers.

The ETR for fiscal 2022 was lower than our combined federal and state statutory rate primarily due to the tax benefit related to shared-based compensation, partially offset by non-deductible compensation paid to executive officers.

Net income decreased by $5.1 million to $38.5 million for fiscal 2023 from $43.6 million for fiscal 2022.

The diluted net income per share was $5.39 per share for fiscal 2023, compared to diluted net income per share of $5.91 per share for fiscal 2022.

Diluted weighted average shares outstanding decreased by approximately 237,000 shares to approximately 7,118,000 shares for fiscal 2023 from approximately 7,355,000 shares for fiscal 2022.

The decrease in diluted weighted average shares outstanding was primarily due to the repurchase of shares of our common stock since January 1, 2022, 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.

The decrease in diluted weighted average shares outstanding was primarily due to the repurchase of shares of our common stock since December 31, 2022, 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.

least the next 12 months.

As of December 30, 2023, we have $45.6 million of cash and cash equivalents and $195.5 million of borrowing capacity under our revolving credit facility.

In fiscal 2022, our cash and cash equivalents decreased by $34.7 million, completing the year with cash and cash equivalents of $31.4 million.

The principal drivers of the reduction of cash were the repurchase and retirement of shares of our common stock throughout the year under our share repurchase program, consideration paid for business acquisitions, payments of dividends, and payments made in respect of forgivable loans.

In fiscal 2023, our cash and cash equivalents increased by $14.1 million, completing the year with cash and cash equivalents of $45.6 million.

The principal drivers of the increase of cash were growth in sales and strong collections of accounts receivable offset by the repurchase and retirement of shares of our common stock throughout the year under our share repurchase program, payments of dividends, and payments made in respect of forgivable loans.

During fiscal 2023, working capital (defined as current assets less current liabilities) decreased by $2.3 million to end fiscal 2023 at $29.4 million.

The decrease in working capital was principally due to a decrease in cash and cash equivalents of $34.7 million, a decrease in the current portion of forgivable loans of $0.9 million, an increase in accounts payable of $4.1 million, and an increase of $1.6 million in the current portion of lease liabilities.

Partially offsetting these decreases to working capital were an increase in accounts receivable and unbilled services of $32.9 million, an increase of $2.2 million in prepaid expenses and other current assets, a decrease in accrued expenses of $0.5 million, a decrease in deferred revenue and other liabilities of $0.8 million and a decrease in the current portion of deferred compensation of $0.4 million, which was primarily related to the payment of contingent consideration.

The decrease in working capital was principally due to an increase in accrued expenses of $15.2 million, an increase in the current portion of deferred compensation of $1.9 million, a decrease of $1.2 million in prepaid expenses and other current assets, an increase in accounts payable of $1.1 million, a decrease in the current portion of forgivable loans of $0.9 million, an increase of $0.5 million in the current portion of lease liabilities, and an increase in deferred revenue and other liabilities of $0.3 million.

Partially offsetting these decreases to working capital were an increase in cash and cash equivalents of $14.1 million and an increase in accounts receivable and unbilled services of $4.6 million.

At December 30, 2023, $10.6 million of our cash and cash equivalents were held within the U.S.

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As of December 30, 2023, our cash accounts were concentrated at two financial institutions, which potentially exposes us to credit risks.

The financial institutions have short-term credit ratings of A-1 and A-2 by Standard & Poor's ratings services.

We have not experienced any losses related to such accounts.

The financial institutions are creditworthy and we have not experienced any losses related to such accounts.

We do not believe that there is significant risk of non-performance by the financial institutions, and its cash on deposit is fully liquid.

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Net income was $38.5 million for fiscal 2023.

Sources of cash for operating activities included a $2.2 million increase in accounts payable, accrued expenses, and other liabilities.

Offsetting these sources of cash for operating activities included a $30.3 million increase in accounts receivable and unbilled receivables, a $16.5 million decrease in lease liabilities, a $0.5 million increase in prepaid expenses and other current assets, a $10.6 million increase in forgivable loans, (comprised of $35.0 million of forgivable loan issuances, net of repayments, offset by $24.4 million of forgivable loan amortization) and $0.5 million related foreign currency translation.

Cash provided by operating activities included non-cash depreciation and amortization expense of $12.0 million, share-based compensation expenses of $4.8 million, incentive cash awards of $6.6 million, right-of-use asset amortization of $13.7 million.

During fiscal 2022, net cash used in investing activities was $18.2 million, which included $14.4 million of net consideration paid for the acquisition of Welch Consulting, Ltd.

(“Welch Consulting”) and bioStrategies Group, Inc.

(“bSG”), and $3.8 million for capital expenditures.

Sources of cash for operating activities included a $8.1 million increase in incentive cash awards payable, a $4.0 million increase in accounts payable, accrued expenses, and other liabilities, a $2.7 million decrease in forgivable loans, (comprised of $21.5 million of forgivable loan issuances, net of repayments, offset by $24.2 million of forgivable loan amortization), and a $1.2 million decrease in prepaid expenses and other current assets.

Offsetting these sources of cash for operating activities included a $17.8 million decrease in lease liabilities, a $2.9 million increase in accounts receivable and unbilled receivables, and $0.2 million related foreign currency translation.

Cash provided by operating activities included the non-cash items of right-of-use asset amortization of $14.3 million, depreciation and amortization expense of $11.6 million, deferred income tax of $4.6 million, share-based compensation expenses of $4.4 million, and other non-cash deductions of $0.6 million.

During fiscal 2023, net cash used in investing activities was $3.0 million, which included $2.4 million for capital expenditures and $0.6 million of net consideration paid for the acquisition of Welch Consulting, Ltd.

and bioStrategies Group, Inc.

We used $44.5 million of net cash in financing activities during fiscal 2023, primarily as a result of $31.4 million of repurchases of our common stock, payment of $10.8 million of cash dividends and dividend equivalents, and tax withholding payments reimbursed by restricted shares of $3.1 million.

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Lease Commitments

We are a lessee under certain operating leases for office space and equipment, which have remaining lease terms between one and approximately nine years, many of which include one or more options to extend the term for periods of up to five years for each option.

We are a lessee under certain operating leases for office space and equipment, which have remaining lease terms between one and approximately eight years, many of which include one or more options to extend the term for periods of up to five years for each option.

The maturities of lease liabilities, as of December 30, 2023, related to office space and equipment are discussed in Note 5 in our Notes to Consolidated Financial Statements.

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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 consolidated balance sheets and are recorded at a value based on their estimated discounted cash flows.

We do not expect to incur asset retirement obligation or redecoration obligation costs over the next twelve months.

The remainder of our asset retirement obligations and redecoration obligations are approximately $2.6 million and are expected to be settled between fiscal 2026 and fiscal 2031 when the underlying leases terminate.

At December 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 $2.8 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.

We were a party to an amended and restated credit agreement (the "Initial Credit Agreement") that provided us with a $175.0 million revolving credit facility and included a $15.0 million sublimit for the issuance of letters of credit.

On August 19, 2022, we refinanced our revolving credit facility under the Initial Credit Agreement by entering into a Credit Agreement (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 us a $250.0 million revolving credit facility, which may be decreased at our 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, we may elect to not increase the revolving credit facility to $250.0 million.

On August 19, 2022, we refinanced our revolving credit facility by entering into a Credit Agreement (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 us a $250.0 million revolving credit facility, which may be decreased at CRA's option to $200.0 million during the period from July 16 in a year through January 15 in the next year.

Additionally, for the period from January 16 to July 15 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.

Concurrent with our entry into the Credit Agreement, we terminated the Initial Credit Agreement and repaid in full all outstanding indebtedness under the Initial Credit Agreement of approximately $50.0 million.

Also, letters of credit in the aggregate amount of approximately $4.4 million that had been issued under the Initial Credit Agreement were deemed to be issued and outstanding under the revolving credit facility under the Credit Agreement.

In connection with the Credit Agreement, we incurred debt issuance costs from the lenders and third-parties of $1.0 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.

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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.

The forgiveness of the principal amount of the loans is recorded as compensation over the service period, which is consistent with the term of the loans.

Compensation Arrangements

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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.

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.

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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.

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.

Our LTIP allows us to grant 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.

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Share Repurchases

In March 2023 and February 2022, our Board of Directors authorized an expansion to our existing share repurchase program, authorizing the purchase of an additional $20.0 million and $20.0 million, respectively, of our common stock.

In February 2024 and March 2023, our Board of Directors authorized an expansion to our existing share repurchase program, authorizing the purchase of an additional $35.0 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.

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 fiscal 2023, fiscal 2022, and fiscal 2021, we repurchased and retired 296,158 shares, 319,534 shares, and 270,908 shares, respectively, under our share repurchase program at an average price per share of $106.08, $86.47, and $72.53, respectively.

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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.

On August 16, 2022, the U.S.

government enacted the Inflation Reduction Act of 2022 that includes a one percent excise tax on net repurchases of stock after December 31, 2022.

As the Company's issued and outstanding common stock is classified as permanent equity, the excise tax is treated as a specific incremental cost directly attributable to the repurchase.

As such, the incremental cost to repurchase the shares is recorded within equity with an offsetting excise tax liability recognized.

In fiscal 2023, the Company had net share repurchases of $24.8 million resulting in an excise tax payable of $0.2 million.

Dividends to Shareholders

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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 December 31, 2022, January 1, 2022, and January 2, 2021, we paid dividends of $9.6 million, $8.3 million, and $7.5 million, respectively.

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 December 30, 2023, December 31, 2022, and January 1, 2022, we paid dividends of $10.8 million, $9.6 million, and $8.3 million, respectively.

Impact of Inflation

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Many of the other above activities are discretionary in nature.

example, capital expenditures can be deferred, acquisitions can be forgone, and share repurchase programs and regular dividends can be suspended.

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.

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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.

Risk Factors of this annual report on Form 10-K 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 on Form

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis