CRA INTERNATIONAL, INC. - Quarter Report: 2013 March (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission file number: 000-24049

CRA International, Inc.
(Exact name of registrant as specified in its charter)

(617) 425-3000
(Registrant's telephone number, including area code)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

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CRA International, Inc.

INDEX

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PART I. FINANCIAL INFORMATION

ITEM 1.    Financial Statements

CRA International, Inc.

Condensed Consolidated Income Statements (unaudited)

(In thousands, except per share data)

See accompanying notes to the condensed consolidated financial statements.

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CRA International, Inc.

Condensed Consolidated Statements of Comprehensive Income (unaudited)

(In thousands)

See accompanying notes to the condensed consolidated financial statements.

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CRA International, Inc.

Condensed Consolidated Balance Sheets (unaudited)

(In thousands, except share data)

See accompanying notes to the condensed consolidated financial statements.

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CRA International, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

(In thousands)

See accompanying notes to the condensed consolidated financial statements

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CRA International, Inc.

Condensed Consolidated Statement of Shareholders' Equity (unaudited)

(In thousands, except share data)

See accompanying notes to the condensed consolidated financial statements.

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CRA International, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Description of Business

        CRA International, Inc. ("CRA") is a worldwide leading consulting services firm that applies advanced analytic techniques and in-depth industry knowledge to complex engagements for a broad range of clients. CRA offers its services in two broad areas: litigation, regulatory and financial consulting and management consulting. CRA operates in one business segment, which is consulting services. CRA operates its business under its registered trade name, Charles River Associates.

2. Unaudited Interim Condensed Consolidated Financial Statements and Estimates

        The following financial statements included in this report are unaudited: the condensed consolidated income statements for the fiscal quarters ended March 29, 2014 and March 30, 2013, the condensed consolidated statements of comprehensive income for the fiscal quarters ended March 29, 2014 and March 30, 2013, the condensed consolidated balance sheet as of March 29, 2014, the condensed consolidated statements of cash flows for the fiscal quarters ended March 29, 2014 and March 30, 2013, and the condensed consolidated statement of shareholders' equity for the fiscal quarter ended March 29, 2014. In the opinion of management, these statements include all adjustments necessary for a fair presentation of CRA's consolidated financial position, results of operations, and cash flows. The condensed consolidated balance sheet as of December 28, 2013 included in this report was derived from audited consolidated financial statements included in CRA's Annual Report on Form 10-K that was filed on March 13, 2014.

        The preparation of financial statements in conformity with generally accepted accounting principles in the U.S. ("U.S. GAAP") requires management to make significant estimates and judgments that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates in these consolidated financial statements include, but are not limited to, accounts receivable allowances, revenue recognition on fixed price contracts, depreciation of property and equipment, share-based compensation, valuation of acquired intangible assets, impairment of long-lived assets, goodwill, accrued and deferred income taxes, valuation allowances on deferred tax assets, accrued compensation, accrued exit costs, and other accrued expenses. These items are monitored and analyzed by CRA for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. CRA bases its estimates on historical experience and various other assumptions that CRA believes to be reasonable under the circumstances. Actual results may differ from those estimates if CRA's assumptions based on past experience or other assumptions do not turn out to be substantially accurate.

3. Principles of Consolidation

        The condensed consolidated financial statements include the accounts of CRA and its wholly owned subsidiaries. In addition, the condensed consolidated financial statements include CRA's interest in NeuCo, Inc. ("NeuCo"). All significant intercompany accounts have been eliminated.

        CRA's ownership interest in NeuCo constitutes control under U.S. GAAP for all periods presented. Therefore, NeuCo's financial results have been consolidated with CRA, and the portion of NeuCo's results allocable to its other owners is shown as "noncontrolling interest."

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CRA International, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

3. Principles of Consolidation (Continued)

        NeuCo's interim reporting schedule is based on calendar month-ends, but its fiscal year end is the last Saturday of November. CRA's quarterly results could include a few days reporting lag between CRA's quarter end and the most recent financial statements available from NeuCo. CRA does not believe that the reporting lag will have a significant impact on CRA's consolidated income statements or financial condition.

4. Recent Accounting Standards

Presentation of Unrecognized Tax Benefits

        In July 2013, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11") to clarify the presentation of current and deferred income taxes on the balance sheet. Under ASU 2013-11, companies generally must present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, for an NOL carryforward, similar tax loss, or tax credit carryforward using the "net presentation" approach as a reduction of a deferred tax asset, with some allowed exceptions. ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. CRA's adoption of ASU 2013-11 in the first quarter of fiscal 2014 had no impact on its financial position, results of operations, cash flows, or disclosures.

Cumulative Translation Adjustment

        In March 2013, the FASB issued ASU No. 2013-05, Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity ("ASU 2013-05"). ASU 2013-05 addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. ASU 2013-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 and should be applied prospectively. CRA's adoption of ASU 2013-05 in the first quarter of fiscal 2014 had no impact on its financial position, results of operations, cash flows, or disclosures.

5. Cash Equivalents

        Cash equivalents consist principally of money market funds with maturities of three months or less when purchased. As of March 29, 2014, a substantial portion of CRA's cash accounts was concentrated at a single financial institution, which potentially exposes CRA to credit risks. The financial institution has a short-term credit rating of A-2 by Standard & Poor's ratings services. CRA has not experienced any losses related to such accounts. CRA does not believe that there is significant risk of non-performance by the financial institution, and the cash on deposit is fully liquid. CRA continually monitors the credit ratings of this institution.

        The carrying amounts of these instruments classified as cash equivalents are stated at amortized cost, which approximates fair value because of their short-term maturity.

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CRA International, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

6. Prepaid Expenses and Other Current Assets, and Other Assets

        Prepaid expenses and other current assets consist of the following (in thousands):

        Other assets consist of the following (in thousands):

        In order to attract and retain highly skilled professionals, CRA may issue forgivable loans or term loans to employees and non-employee experts which are classified in "prepaid expenses and other current assets" and "other assets" within the accompanying balance sheets as of March 29, 2014 and December 28, 2013. A portion of the term loans are collateralized. The forgivable loans have terms that are generally between three and eight years. The principal amount of forgivable loans and accrued interest is forgiven by CRA over the term of the loans, so long as the employee or non-employee expert continues employment or affiliation with CRA 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. During the first quarter of fiscal 2014, CRA issued approximately $5.0 million in forgivable loans to employees and non-employee experts for future service. As of March 29, 2014, CRA had obligations to issue approximately $4.3 million in forgivable loans to employees, future employees, and non-employee experts for future service, which are included in the $52.6 million of such loans reported as of March 29, 2014 in the table above. CRA expects that the $4.3 million in loans will be issued, and the corresponding payments will be made, before the end of the third quarter of fiscal 2014.

7. Business Acquisition

        On January 31, 2013, CRA announced that an approximate 40-person litigation consulting team joined CRA, effective February 1, 2013. Under an agreement to hire the team, CRA accelerated the previously announced start dates of certain key personnel from May 2013. Under the terms of the transaction, CRA acquired certain intangible assets, accounts receivable, and certain client projects currently underway. The fair values of the assets acquired and the liabilities assumed as part of the acquisition were finalized in the first quarter of fiscal 2014. The acquisition was not material. The acquisition has been accounted for under the purchase method of accounting, and the results of operations have been included in the accompanying income statements from the date of acquisition.

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CRA International, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

8. Goodwill

        In accordance with Accounting Standards Codification ("ASC") Topic 350, "Intangibles—Goodwill and Other," goodwill is not subject to amortization, but is monitored at least annually for impairment, or more frequently, as necessary, if events or circumstances exist that would more likely than not reduce the fair value of the reporting unit below its carrying amount. For CRA's goodwill impairment analysis, CRA operates under one reporting unit. Under ASC Topic 350, in performing the first step of the goodwill impairment testing and measurement process, CRA compares its entity-wide estimated fair value to its net book value to identify potential impairment. Management estimates the entity-wide fair value utilizing CRA's market capitalization, plus an appropriate control premium. Market capitalization is determined by multiplying the shares outstanding on the test date by the market price of CRA's common stock on that date. CRA has utilized a control premium that considers appropriate industry, market and other pertinent factors, including indications of such premiums from data on recent acquisition transactions. If the fair value of CRA is less than its net book value, the second step is performed to determine if goodwill is impaired. If CRA determines through the impairment evaluation process that goodwill has been impaired, an impairment charge would be recorded in its consolidated income statements.

        There were no impairment losses related to goodwill during each of the fiscal quarters ended March 29, 2014 and March 30, 2013, respectively, as there were no events or circumstances that would more likely than not reduce CRA's fair value below its carrying amount.

        CRA continues to monitor its market capitalization. If CRA's market capitalization, plus an estimated control premium, is below its net book value for a period considered to be other-than-temporary, it is possible that CRA may be required to record an impairment of goodwill either as a result of the annual assessment that CRA conducts in the fourth quarter of each fiscal year, or in a future quarter if events or circumstances exist that would more likely than not reduce CRA's fair value below its carrying amount. A non-cash goodwill impairment charge would have the effect of decreasing CRA's earnings in such period.

        The changes in the carrying amount of goodwill during the fiscal quarter ended March 29, 2014, are as follows (in thousands):

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CRA International, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

8. Goodwill (Continued)

        The changes in the carrying amount of goodwill during the fiscal quarter ended March 30, 2013, are as follows (in thousands):

9. Accrued Expenses

        Accrued expenses consist of the following (in thousands):

        As of March 29, 2014 and December 28, 2013, approximately $20.8 million and $40.0 million of accrued bonuses were included above in "Compensation and related expenses".

10. Credit Agreement

        As of March 29, 2014, CRA is party to a credit agreement that provides CRA with a $125.0 million revolving credit facility and a $15 million sublimit for the issuance of letters of credit. CRA may use the proceeds of the revolving credit loans for working capital and other general corporate purposes. CRA may repay any borrowings under the revolving credit facility at any time, but no later than April 24, 2018. There was no amount outstanding under this revolving line of credit as of March 29, 2014.

        As of March 29, 2014, the amount available under this revolving line of credit was reduced by certain letters of credit outstanding, which amounted to $1.4 million. Borrowings under the revolving credit facility bear interest at a rate per annum of either (i) the adjusted base rate, as defined in the credit agreement, plus an applicable margin, which varies between 0.50% and 1.50% depending on CRA's 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 1.50% and 2.50% depending on CRA's total leverage ratio. CRA is required to pay a fee on the unused portion of the revolving credit facility at a rate per annum that varies between 0.25% and 0.375% depending on its total leverage ratio. Borrowings under the credit facility are secured by 100% of the stock of certain

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CRA International, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

10. Credit Agreement (Continued)

of CRA's U.S. subsidiaries and 65% of the stock of certain of its foreign subsidiaries, which represent approximately $6.8 million in net assets as of March 29, 2014.

        Under the credit agreement, CRA 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 credit facility may become immediately due and payable upon the occurrence of stated events of default, including CRA's failure to pay principal, interest or fees or a violation of any financial covenant. The financial covenants require CRA to maintain a consolidated interest expense to adjusted consolidated EBITDA ratio of more than 2.5 to 1.0 and to comply with a consolidated debt to adjusted consolidated EBITDA ratio of not more than 3.0 to 1.0. The non-financial covenant restrictions of the senior credit agreement include, but are not limited to, CRA's ability to incur additional indebtedness, engage in acquisitions or dispositions, and enter into business combinations.

11. Revenue Recognition

        CRA derives substantially all of its revenues from the performance of professional services. The contracts that CRA enters into and operates under specify whether the engagement will be billed on a time-and-materials or a fixed-price basis. Most of CRA's revenue is derived from time-and-materials service contracts. Revenues from time-and-materials service contracts are recognized as services are provided based upon hours worked and contractually agreed-upon hourly rates, as well as indirect fees based upon hours worked. Revenues from a majority of CRA's fixed-price engagements are recognized on a proportional performance method based on the ratio of costs incurred, substantially all of which are labor-related, to the total estimated project costs. In general, project costs are classified in costs of services and are based on the direct salary of the consultants on the engagement plus all direct expenses incurred to complete the engagement, including any amounts billed to CRA by its non-employee experts.

        Revenues also include reimbursable expenses, which include travel and other out-of-pocket expenses, outside consultants, and other reimbursable expenses. Reimbursable expenses are as follows (in thousands):

        CRA's revenues include projects secured by our non-employee experts as well as projects secured by our employees. CRA collects goods and services and value added taxes from customers and records these amounts on a net basis, which is within the scope of ASC Topic 605-45, "Principal Agent Considerations."

12. Net Income per Share

        Basic net income per share represents net income divided by the weighted average shares of common stock outstanding during the period. Diluted net income per share represents net income divided by the weighted average shares of common stock and common stock equivalents, if applicable,

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CRA International, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

12. Net Income per Share (Continued)

outstanding during the period. Common stock equivalents arise from stock options and unvested shares of restricted stock, using the treasury stock method. Under the treasury stock method, the amount CRA would receive on the exercise of stock options and the vesting of shares of restricted stock, the amount of compensation cost for future service that CRA has not yet recognized, and the amount of tax benefits that would be recorded in common stock when these stock options and shares of restricted stock become deductible, are assumed to be used to repurchase shares at the average share price over the applicable fiscal period, and these repurchased shares are netted against the shares underlying these stock options and these unvested shares of restricted stock. A reconciliation of basic to diluted weighted average shares of common stock outstanding is as follows (in thousands):

        For the first quarters of fiscal 2014 and fiscal 2013, the anti-dilutive share based awards that were excluded from the calculation of common stock equivalents for purposes of computing diluted weighted average shares outstanding amounted to 1,287,614 and 1,142,624 shares, respectively. These share-based awards were anti-dilutive because their exercise price exceeded the average market price over the respective period.

        On August 30, 2011, CRA announced that its Board of Directors approved a share repurchase program of up to $7.5 million of CRA's common stock. On February 22, 2012, August 10, 2012, and February 13, 2014, the Board of Directors authorized the repurchase of up to an additional $4.45 million, $5.0 million, and $15.0 million, respectively, of CRA's common stock under these programs. During the first quarter of fiscal 2014, CRA repurchased and retired 95,600 shares under these share repurchase programs at an average price per share of $22.25. During the first quarter of fiscal 2013, CRA did not repurchase and retire any shares of its common stock under these programs. There was approximately $14.3 million available for future repurchases under these programs as of March 29, 2014. CRA may repurchase shares under these programs in open market purchases or in privately negotiated transactions in accordance with applicable insider trading and other securities laws and regulations.

13. Income Taxes

        CRA's effective income tax rates were 38.6% and 16.0% for the first quarter of fiscal 2014 and the first quarter of fiscal 2013, respectively. The effective tax rate in the first quarter of fiscal 2014 was lower than the combined federal and state statutory tax rate primarily due to the geographical mix of earnings and certain items that were treated as discrete items in the first quarter of fiscal 2014. The effective tax rate in the first quarter of fiscal 2013 was lower than CRA's combined federal and state statutory tax rate due to the utilization of net operating loss carryforwards in the United Kingdom. The effective tax rate in the first quarter of fiscal 2013 was also impacted by a favorable tax settlement.

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CRA International, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

14. Restructuring Charges

        CRA did not incur any restructuring charges during the first quarter of fiscal 2014 or the first quarter of fiscal 2013. The restructuring reserve balance was as follows as of March 29, 2014 (in thousands):

        On the accompanying balance sheet as of March 29, 2014, the reserve balance of $0.9 million was classified as follows: approximately $0.7 million in "current portion of deferred rent", and approximately $0.1 million in "deferred rent and facility-related non-current liabilities."

        The restructuring reserve balance was as follows as of March 30, 2013 (in thousands):

15. Compensation Arrangements

        In connection with an acquisition completed in fiscal 2013, the CRA agreed to pay incentive performance awards to certain non-employee experts and employees of the acquired business, if specific performance targets are met from June 2013 through May 2017. Retention of amounts paid is contingent on the individuals' continued relationships with CRA through May 2019. The amount of the award could fluctuate depending on future performance through May 2017. Changes in the estimated award are expensed prospectively over the remaining service period.

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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 this quarterly report and 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 ethics applicable to our principal executive officer, principal financial officer, and principal accounting officer.

Critical Accounting Policies and Significant Estimates

        The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S. ("U.S. GAAP"). The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, as well as related disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates in these condensed consolidated financial statements include, but are not limited to, accounts receivable allowances, revenue recognition on fixed price contracts, depreciation of property and equipment, share-based compensation, valuation of acquired intangible assets, impairment of long lived assets, goodwill, accrued and deferred income taxes, valuation allowances on deferred tax assets, accrued compensation, accrued exit costs, and other accrued expenses. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if our assumptions based on past experience or our other assumptions do not turn out to be substantially accurate.

        We have described our significant accounting policies in Note 1 to our consolidated financial statements included in our annual report on Form 10-K for fiscal 2013. We have reviewed our accounting policies, identifying those that we believe to be critical to the preparation and understanding of our consolidated financial statements in the list set forth below. See the disclosure under the heading "Critical Accounting Policies" in Item 7 of Part II of our annual report on Form 10-K for fiscal 2013 for a detailed description of these policies and their potential effects on our results of operations and financial condition.

•

Revenue recognition and accounts receivable allowances



•

Share-based compensation expense

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•

Valuation of goodwill and other intangible assets



•

Accounting for income taxes

        We did not adopt any changes in the first quarter of fiscal 2014 that had a material effect on these critical accounting policies nor did we make any changes to our accounting policies in the first quarter of fiscal 2014 that changed these critical accounting policies.

Recent Accounting Standards

        See Note 4 to our condensed consolidated financial statements included in this quarterly report on Form 10-Q for a discussion of recent accounting standards.

Results of Operations

        The following table provides operating information as a percentage of revenues for the periods indicated:

Quarter Ended March 29, 2014 Compared to the Quarter Ended March 30, 2013

        Revenues.    Revenues increased $13.1 million, or 20.8%, to $76.2 million for the first quarter of fiscal 2014 from $63.1 million for the first quarter of fiscal 2013. Our revenue increase was due primarily to the continued momentum from the latter part of fiscal 2013 into the first quarter of fiscal 2014 after a slow start in the first half of fiscal 2013. Revenue increased in our litigation, regulatory, and financial consulting business and management consulting business in the second half of fiscal 2013 and into the first quarter of fiscal 2014, reflecting organic growth and increasing contributions from the new senior-level hires we welcomed to CRA during the first quarter of fiscal 2013. Utilization increased to 78% for the first quarter of fiscal 2014 from 67% for the first quarter of fiscal 2013. Another factor contributing to our overall revenue increase was an increase in client reimbursable expenses, which are pass-through expenses that carry little to no margin, in the first quarter of fiscal 2014 as compared to the first quarter of fiscal 2013.

        Overall, revenues outside of the U.S. represented approximately 25% of total revenues for the first quarter of fiscal 2014, compared with 24% of total revenues for the first quarter of fiscal 2013.

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Revenues derived from fixed-price engagements decreased to 12% of total revenues for the first quarter of fiscal 2014 compared with 13% for the first quarter of fiscal 2013. This decrease was due primarily to the decrease in percentage of our revenue related to our management consulting business as the management consulting business typically has a higher concentration of fixed-price service contracts.

        Costs of Services.    Costs of services increased $9.9 million, or 23.4%, to $51.9 million for the first quarter of fiscal 2014 from $42.0 million for the first quarter of fiscal 2013. The increase in costs of services was due primarily to an increase in incentive compensation expense for our employee consultants, principally as a result of an increase in profitability. Costs of services also had an increase of $1.4 million in client reimbursable expenses for the first quarter of fiscal 2014 as compared to the first quarter of fiscal 2013. As a percentage of revenues, costs of services increased to 68.0% for the first quarter of fiscal 2014 from 66.6% for the first quarter of fiscal 2013 due primarily to the increase in incentive compensation expense for our employee consultants and client reimbursable expenses as a percentage of revenues in the first quarter of fiscal 2014 as compared with the first quarter of fiscal 2013.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses increased by $1.4 million, or 8.6%, to $17.2 million for the first quarter of fiscal 2014 from $15.8 million for the first quarter of fiscal 2013. The primary contributors to this increase were increased compensation expense, increased rent and office operating expenses and increased professional fees for the first quarter of fiscal 2014 as compared to the first quarter of fiscal 2013.

        As a percentage of revenues, selling, general and administrative expenses decreased to 22.5% for the first quarter of fiscal 2014 from 25.0% for the first quarter of fiscal 2013 due primarily to the increase in revenues outpacing the increased compensation expense, rent and office operating expenses professional fees, and commissions to our nonemployee experts in the first quarter of fiscal 2014 as compared with the first quarter of fiscal 2013.

        Other Expense, Net.    Other expense, net decreased by $271,000 to $120,000 for the first quarter of fiscal 2014 from $391,000 for the first quarter of fiscal 2013. Other expense, net consists primarily of foreign currency exchange transaction gains and losses. The multi-currency credit facility we entered into on April 24, 2013 allows us to minimize such foreign exchange exposures. We continue to manage our foreign currency exchange exposure through frequent settling of intercompany account balances and by self-hedging movements in exchange rates between the value of the dollar and foreign currencies including the Euro and the British Pound.

        Provision for Income Taxes.    For the first quarter of fiscal 2014, our provision for income taxes was $2.1 million and the effective tax rate was 38.6% compared to a provision of $0.5 million and an effective tax rate of 16.0% for the first quarter of fiscal 2013. The effective tax rate in the first quarter of fiscal 2014 was lower than our combined federal and state statutory tax rate due to the geographical mix of earnings and certain items that were treated as discrete items in the first quarter of fiscal 2014. The effective tax rate in the first quarter of fiscal 2013 was lower than our combined federal and state statutory tax rate due to the utilization of net operating loss carryforwards in the United Kingdom. The effective tax rate in the first quarter of fiscal 2013 was also impacted by a favorable tax settlement.

        Net Loss Attributable to Noncontrolling Interest, Net of Tax.    Our ownership interest in NeuCo constitutes control under U.S GAAP. As a result, NeuCo's financial results are consolidated with ours, and allocations of the noncontrolling interest's share of NeuCo's net income result in deductions to our net income, while allocations of the noncontrolling interest's share of NeuCo's net loss result in additions to our net income. Our ownership interest in NeuCo is 55.89%. The result of operations of NeuCo allocable to its other owners was a net loss of $102,000 for the first quarter of fiscal 2014 and a net loss of $134,000 for the first quarter of fiscal 2013.

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        Net Income Attributable to CRA International, Inc.    Net income attributable to CRA International, Inc. increased by $0.4 million to $3.4 million for the first quarter of fiscal 2014 from $3.0 million for the first quarter of fiscal 2013. Diluted net income per share was $0.34 per share for the first quarter of fiscal 2014, compared to $0.29 per share for the first quarter of fiscal 2013. Diluted weighted average shares outstanding increased by approximately 24,000 shares to approximately 10,108,000 shares for the first quarter of fiscal 2014 from approximately 10,084,000 shares for the first quarter of fiscal 2013. The increase in diluted weighted average shares outstanding was primarily due to restricted shares that have vested or that have been issued and stock options that have been exercised since the first quarter of fiscal 2013, offset in part by repurchases of common stock since the first quarter of fiscal 2013.

Liquidity and Capital Resources

        We believe that current cash and cash equivalents, cash generated from operations, and amounts available under our bank line of credit will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 12 months.

        General.    In the first quarter of fiscal 2014, cash and cash equivalents decreased by $18.8 million. We completed the quarter with cash and cash equivalents of $32.5 million and working capital (defined as current assets less current liabilities) of $74.5 million. Of the total cash and cash equivalents of $32.5 million at March 29, 2014, $21.9 million was held within the U.S. We have sufficient sources of cash in the U.S. to fund U.S. cash requirements without the need to repatriate any funds.

        As of March 29, 2014, a substantial portion of our cash accounts was concentrated at a single financial institution, which potentially exposes us to credit risks. The financial institution has a short-term credit rating of A-2 by Standard & Poor's ratings services. 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 institution, and our cash on deposit at this financial institution is fully liquid. We continually monitor the credit ratings of such institution. A change in the credit worthiness of this financial institution could materially affect our liquidity and working capital.

        Sources and Uses of Cash.    During the first quarter of fiscal 2014, net cash used in operating activities was $14.5 million. The primary factor in cash used in operations was the decrease in "accounts payable, accrued expenses, and other liabilities" of $17.4 million due to the payment of the majority of our fiscal 2013 performance bonuses during the first quarter of fiscal 2014. Other uses of cash included a decrease in "unbilled services" of $5.0 million due to the increase in revenue. Sources of cash included a $2.2 million net favorable movement in "accounts receivable" and "accounts receivable allowances" due primarily to cash collections on accounts receivable balances during the first quarter of fiscal 2014. Cash provided by operations also included net income of $3.3 million, non-cash charges for depreciation and amortization expense of $1.6 million, and share-based compensation expense of $1.3 million, partially offset by decreased "deferred rent" of $0.7 million.

        During the first quarter of fiscal 2014, net cash used by investing activities was $2.0 million, which included $1.5 million of net acquisition consideration payments and $0.4 million for capital expenditures.

        We used $2.3 million of net cash in financing activities during the first quarter of fiscal 2014, primarily for the repurchase and retirement of our common stock of $2.1 million and the redemption of $0.1 million in vested employee restricted shares for tax withholdings.

Indebtedness

        As of March 29, 2014, we are party to a credit agreement that provides us with a $125.0 million revolving credit facility and a $15 million sublimit for the issuance of letters of credit. We may use the

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proceeds of the revolving credit loans 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 must repay all borrowings no later than April 24, 2018. There were no amounts outstanding under this revolving line of credit as of March 29, 2014.

        The amount available under this revolving line of credit is reduced by certain letters of credit outstanding, which amounted to $1.4 million as of March 29, 2014.

        Borrowings under the revolving credit facility bear interest at a rate per annum of either (i) the adjusted base rate, as defined in the credit agreement, plus an applicable margin, which varies between 0.50% and 1.50% 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 1.50% and 2.50% 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 0.25% and 0.375% depending on our total leverage ratio. Borrowings under the 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 $6.8 million in net assets as of December 28, 2013.

        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 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 a consolidated interest expense to adjusted consolidated EBITDA ratio of more than 2.5 to 1.0 and to comply with a consolidated debt to adjusted consolidated EBITDA ratio of not more than 3.0 to 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.

Forgivable Loans and Term Loans

        In order to attract and retain highly skilled professionals, we may issue forgivable loans or term loans to employees and non-employee experts. The forgivable loans have terms that are generally between three and eight years. The principal amount of forgivable loans and accrued interest is forgiven by us over the term of the loans, so long as the employee or non-employee expert continues employment or affiliation with us and complies with certain contractual requirements. The expense associated with the forgiveness of the principal amount of the loans is recorded as compensation expense over the service period, which is consistent with the term of the loans. During the first quarter of fiscal 2014, we issued approximately $5.0 million in forgivable loans to employees and non-employee experts for future service. As of March 29, 2014, we had obligations to issue approximately $4.3 million in forgivable loans to employees, future employees and non-employee experts for future service. We expect that the $4.3 million in loans will be issued, and the corresponding payments will be made, before the end of the third quarter of fiscal 2014.

Compensation Arrangements

        In connection with an acquisition completed in fiscal 2013, we agreed to pay incentive performance awards to certain non-employee experts and employees of the acquired business, if specific performance targets are met from June 2013 through May 2017. Retention of amounts paid is contingent on the individuals' continued relationships with us through May 2019. The amount of the award could fluctuate depending on future performance through May 2017. Changes in the estimated award are expensed prospectively over the remaining service period. We believe that we will have sufficient funds to satisfy any obligations related to the incentive performance awards. We expect to fund these payments, if any, from existing cash resources, cash generated from operations, or financing transactions.

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Business Acquisition

        On January 31, 2013, we announced that an approximate 40-person litigation consulting team had joined us, effective February 1, 2013. Under an agreement to hire the team, we accelerated the previously announced start dates of certain key personnel from May 2013. Under the terms of the transaction, we acquired certain intangible assets, accounts receivable, and certain client projects currently underway. The fair value of the assets acquired and the liabilities assumed as part of the acquisition were finalized in the first quarter of fiscal 2014. The acquisition was not material. The acquisition was accounted for under the purchase method of accounting, and the results of operations have been included in the accompanying statements of operations from the date of acquisition.

        As part of our business, we regularly evaluate opportunities to acquire other consulting firms, practices or groups or other businesses. In recent years, we have typically paid for acquisitions with cash, or a combination of cash and our common 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 current senior loan agreement, will depend on several factors, including our future profitability, the levels of our debt and equity, restrictions under our existing line of credit with our bank, and the overall credit and equity market environments.

Share Repurchases

        On August 30, 2011, we announced that our Board of Directors approved a share repurchase program of up to $7.5 million of our common stock. On February 22, 2012, August 10, 2012, and February 13, 2014, the Board of Directors authorized the repurchase of up to an additional $4.45 million, $5.0 million, and $15.0 million, respectively, of our common stock under these programs. During the first quarter of fiscal 2014, we repurchased and retired 95,600 shares of our common stock under this program at an average price per share of $22.25. Approximately $14.3 million was available for future repurchases under these programs as of March 29, 2014. We will finance these programs with available cash and cash from future operations. We may repurchase shares under these programs in open market purchases or in privately negotiated transactions in accordance with applicable insider trading and other securities laws and regulations. We expect to continue to repurchase shares under these programs.

Contractual Obligations

        On February 24, 2014, we entered into a new lease with BP Hancock LLC, as landlord, for the 9th and 10th floors (a total of 57,602 square feet) of the same office building at 200 Clarendon Street, Boston, Massachusetts in which our Boston offices are currently located. The lease's base term will expire ten years from the date that we begin paying fixed rent under the lease and, subject to certain conditions, will be extendible by us for two five-year periods. The annual fixed rent for this office space (which does not include customary operating costs and expenses) will be $42 per square foot, or $2.4 million, for the first year of the lease's base term and will increase at the rate of $1.00 per square foot during the remainder of the lease's base term. The lease gives us a right of first refusal to rent certain additional office space in the office building if it becomes available. The performance of our obligations under the lease is secured by a $1 million letter of credit.

        Concurrently with our entering into this new lease, we also entered into an amendment of our existing lease with BP Hancock LLC, as landlord, for the office space we currently rent in the office building described above, which currently expires on March 31, 2015. Except with respect to 25,099 square feet of office space covered by this lease, the amendment either extends the term of this lease to, or if prior to March 31, 2015 terminates this lease on, the day prior to the date that we begin

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paying fixed rent under the new lease described above. If the term of the existing lease is extended, the amendment provides that the base rent payable under this lease during the extension period will be $2.4 million per year.

        We expect that the term of the new lease will commence, and the relocation of our Boston offices to the 9th and 10th floors of the office building at 200 Clarendon Street, Boston, Massachusetts will occur, sometime in the third quarter of fiscal 2015.

Factors Affecting Future Performance

        Part II, Item 1A of this quarterly 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 quarterly report. If any of these risks, or any risks not presently known to us or that we currently believe are not significant, develops into an actual event, then our business, financial condition, and results of operations could be adversely affected.

ITEM 3.    Quantitative and Qualitative Disclosures About Market Risk

Foreign Exchange Risk

        The majority of our operations are based in the U.S., and, accordingly, the majority of our transactions are denominated in U.S. Dollars. However, we have foreign-based operations where transactions are denominated in foreign currencies and are subject to market risk with respect to fluctuations in the relative value of foreign currencies. Our primary foreign currency exposures relate to our short-term intercompany balances with our foreign subsidiaries and accounts receivable and cash valued in the United Kingdom in U.S. Dollars or Euros. Our primary foreign subsidiaries have functional currencies denominated in the British Pound and the Euro, and foreign denominated assets and liabilities are re-measured each reporting period with any exchange gains and losses recorded in our consolidated income statements. We continue to manage our foreign currency exchange exposure through frequent settling of intercompany account balances and by self-hedging movements in exchange rates between the value of the U.S. Dollar and foreign currencies and the Euro and the British Pound. Holding all other variables constant, fluctuations in foreign exchange rates may impact reported revenues and expenses significantly, based on currency exposures at March 29, 2014. A hypothetical 10% movement in foreign exchange rates would have affected our income before provision for income taxes for the first quarter of fiscal 2014 by approximately $0.3 million. However, actual gains and losses in the future could differ materially from this analysis based on the timing and amount of both foreign currency exchange rate movements and our actual exposure.

        From time to time, we may use derivative instruments to manage the risk of exchange rate fluctuations. However, at March 29, 2014, we had no outstanding derivative instruments. We do not use derivative instruments for trading or speculative purposes.

Interest Rate Risk

        We maintain an investment portfolio consisting mainly of money market funds with maturities of three months or less when purchased. These held-to-maturity securities are subject to interest rate risk. However, a hypothetical change in the interest rate of 10% would not have a material impact to the fair values of these securities at March 29, 2014 primarily due to their short maturity.

ITEM 4.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

        Under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our

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disclosure controls and procedures as of the end of the period covered by this report to provide reasonable assurance that we record, process, summarize and report the information we must disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended, within the time periods specified in the SEC's rules and forms. Based upon that evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of March 29, 2014, due to the material weakness in internal controls over our income tax accounting and reporting for income taxes described in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 28, 2013.

        Notwithstanding the material weakness, management has concluded that the consolidated financial statements included in this Form 10-Q present fairly, in all material aspects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

Evaluation of Changes in Internal Control over Financial Reporting

        Other than with respect to the ongoing remediation of the material weakness in internal controls over our income tax accounting and reporting for income taxes pursuant to the plan described in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 28, 2013, there were no changes in our internal control over financial reporting identified in connection with the above evaluation that occurred during the first quarter of fiscal 2014 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.