XNAS:HCKT Hackett Group Inc Quarterly Report 10-Q Filing - 6/29/2012

Effective Date 6/29/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

 

    x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 29, 2012

OR

 

    ¨     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from          to         

Commission File Number 0-24343

 

 

The Hackett Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

FLORIDA   65-0750100

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1001 Brickell Bay Drive, Suite 3000

Miami, Florida

  33131
(Address of principal executive offices)   (Zip Code)

(305) 375-8005

(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 requirement for the past 90 days.    YES  x    NO  ¨

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  x    NO  ¨

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

 

Large Accelerated Filer   ¨    Accelerated Filer   x
Non-Accelerated Filer   ¨  (Do not check if a smaller reporting company)    Smaller Reporting Company   ¨

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

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

As of August 2, 2012, there were 30,471,128 shares of common stock outstanding.

 

 

 


The Hackett Group, Inc.

TABLE OF CONTENTS

 

        Page  

PART I - FINANCIAL INFORMATION

 

Item 1.

  Financial Statements  
  Consolidated Balance Sheets as of June 29, 2012 and December 30, 2011 (unaudited)     3   
  Consolidated Statements of Operations for the Quarters and Six Months Ended June 29, 2012 and July 1, 2011 (unaudited)     4   
  Consolidated Statements of Comprehensive Income for the Quarters and Six Months Ended June 29, 2012 and July 1, 2011 (unaudited)     5   
  Consolidated Statements of Cash Flows for the Six Months Ended June 29, 2012 and July 1, 2011 (unaudited)     6   
  Notes to Consolidated Financial Statements (unaudited)     7   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations     13   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk     16   

Item 4.

  Controls and Procedures     16   
PART II - OTHER INFORMATION  

Item 1.

  Legal Proceedings     17   

Item 1A.

  Risk Factors     17   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds     17   

Item 6.

  Exhibits     17   

SIGNATURES

    18   

INDEX TO EXHIBITS

    19   

 

2


PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

The Hackett Group, Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

 

                             
     June 29,
2012
    December 30,
2011
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 13,806      $ 32,936   

Accounts receivable and unbilled revenue, net of allowance of $833 and $799 at June 29, 2012 and December 30, 2011, respectively

     37,078        35,209   

Prepaid expenses and other current assets

     9,096        9,319   
  

 

 

   

 

 

 

Total current assets

     59,980        77,464   

Restricted cash

     683        885   

Property and equipment, net

     12,671        11,696   

Other assets

     1,910        1,823   

Goodwill, net

     75,633        75,558   
  

 

 

   

 

 

 

Total assets

   $ 150,877      $ 167,426   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 6,713      $ 7,433   

Accrued expenses and other liabilities

     25,848        28,018   

Current portion of long-term debt

     6,316        —     
  

 

 

   

 

 

 

Total current liabilities

     38,877        35,451   

Accrued expenses and other liabilities, non-current

     1,555        1,727   

Long-term debt

     25,684        —     
  

 

 

   

 

 

 

Total liabilities

     66,116        37,178   
  

 

 

   

 

 

 

Commitments and contingencies

    

Shareholders’ equity:

    

Preferred stock, $.001 par value, 1,250,000 shares authorized, none issued and outstanding

     —          —     

Common stock, $.001 par value, 125,000,000 shares authorized; 51,582,112 and 61,315,237 shares issued at June 29, 2012 and December 30, 2011, respectively

     52        61   

Additional paid-in capital

     260,223        313,202   

Treasury stock, at cost, 21,171,370 shares at June 29, 2012 and December 30, 2011

     (74,444     (74,444

Accumulated deficit

     (95,751     (103,129

Accumulated other comprehensive loss

     (5,319     (5,442
  

 

 

   

 

 

 

Total shareholders’ equity

     84,761        130,248   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 150,877      $ 167,426   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

3


The Hackett Group, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

     Quarter Ended      Six Months Ended  
     June 29,
2012
    July 1,
2011
     June 29,
2012
    July 1,
2011
 

Revenue:

         

Revenue before reimbursements

   $   54,242      $   52,382       $   105,832      $ 99,339   

Reimbursements

     7,042        6,427         12,470        12,332   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total revenue

     61,284        58,809         118,302        111,671   

Costs and expenses:

         

Cost of service:

         

Personnel costs before reimbursable expenses (includes $762 and $812 and $1,522 and $1,564 of stock compensation expense in the quarters and six months ended June 29, 2012 and July 1, 2011, respectively)

     34,629        32,815         67,778        63,075   

Reimbursable expenses

     7,042        6,427         12,470        12,332   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total cost of service

     41,671        39,242         80,248        75,407   

Selling, general and administrative costs (includes $679 and $489 and $1,186 and $663 of stock compensation expense in the quarters and six months ended June 29, 2012 and July 1, 2011, respectively)

     15,123        15,064         29,905        28,275   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total costs and operating expenses

     56,794        54,306         110,153        103,682   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income from operations

     4,490        4,503         8,149        7,989   

Other income (expense):

         

Interest income

     8        12         17        13   

Interest expense

     (247     —           (274     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes

     4,251        4,515         7,892        8,002   

Income taxes

     406        112         514        272   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 3,845      $ 4,403       $ 7,378      $ 7,730   
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic net income per common share:

         

Net income per common share

   $ 0.13      $ 0.11       $ 0.22      $ 0.19   

Weighted average common shares outstanding

     29,290        40,016         33,907        40,211   

Diluted net income per common share:

         

Net income per common share

   $ 0.12      $ 0.10       $ 0.21      $ 0.18   

Weighted average common and common equivalent shares outstanding

     31,509        42,258         35,724        42,017   

The accompanying notes are an integral part of the consolidated financial statements.

 

4


The Hackett Group, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

     Quarter Ended      Six Months Ended  
     June 29,
2012
    July 1,
2011
     June 29,
2012
     July 1,
2011
 

Net income

   $   3,845      $   4,403       $   7,378       $   7,730   

Foreign currency translation adjustment

     (547     110         123         794   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total comprehensive income

   $ 3,298      $ 4,513       $ 7,501       $ 8,524   
  

 

 

   

 

 

    

 

 

    

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

5


The Hackett Group, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Six Months Ended  
     June 29,
2012
    July 1,
2011
 

Cash flows from operating activities:

    

Net income

   $ 7,378      $ 7,730   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation expense

     1,105        917   

Amortization expense

     274        404   

Provision (reversal) for doubtful accounts

     96        (648

Loss (gain) on foreign currency translation

     203        (113

Non-cash stock compensation expense

     2,708        2,227   

Changes in assets and liabilities:

    

Increase in accounts receivable and unbilled revenue

     (1,964     (4,812

Decrease (increase) in prepaid expenses and other assets

     354        (189

(Decrease) increase in accounts payable

     (720     1,151   

Decrease in accrued expenses and other liabilities

     (3,158     (5,031
  

 

 

   

 

 

 

Net cash provided by operating activities

     6,276        1,636   

Cash flows from investing activities:

    

Purchases of property and equipment

     (2,104     (3,336

Decrease in restricted cash

     203        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,901     (3,336

Cash flows from financing activities:

    

Debt proceeds

     40,000        —     

Payment of debt proceeds

     (8,000     —     

Debt issuance cost

     (482     —     

Proceeds from issuance of common stock

     439        316   

Repurchases of common stock

     (55,587     (6,041
  

 

 

   

 

 

 

Net cash used in financing activities

     (23,630     (5,725

Effect of exchange rate on cash

     125        (37

Net decrease in cash and cash equivalents

     (19,130     (7,462

Cash and cash equivalents at beginning of year

     32,936        25,337   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 13,806      $   17,875   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid (refunded) for income taxes

   $ 123      $ (396

Cash paid for interest

   $ 227      $ —     

The accompanying notes are an integral part of the consolidated financial statements.

 

6


The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation and General Information

Basis of Presentation

The accompanying consolidated financial statements of The Hackett Group, Inc. (“Hackett” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the Company’s accounts and those of its wholly owned subsidiaries which the Company is required to consolidate. All intercompany transactions and balances have been eliminated in consolidation.

In the opinion of management, the accompanying consolidated financial statements reflect all normal and recurring adjustments which are necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows as of the dates and for the periods presented. The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, these statements do not include all the disclosures normally required by U.S. GAAP for annual financial statements and should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 30, 2011, included in the Annual Report on Form 10-K filed by the Company with the SEC. The consolidated results of operations for the quarter and six months ended June 29, 2012, are not necessarily indicative of the results to be expected for any future period or for the full fiscal year.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Fair Value

The Company’s financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable and unbilled revenue, accounts payable, accrued expenses and other liabilities and debt.

As of June 29, 2012 and December 30, 2011, the carrying amount of all financial instruments, with the exception of the debt, approximated the respective fair value due to the short-term nature and maturity of these instruments.

The Company uses significant other observable market data or assumptions (Level 2 inputs as defined in accounting guidance) that it believes market participants would use in pricing debt. The fair value of the debt approximated the carrying amount, using Level 2 inputs, due to the short-term variable interest rates based on market rates.

Recently Issued Accounting Standards

In May 2011, the Financial Accounting Standards Board (“FASB”) issued guidance to achieve consistent fair value measurements and to clarify certain disclosure requirements for fair value measurements. The guidance includes clarification about when the concept of highest and best use is applicable to fair value measurements, requires quantitative disclosures about inputs used and qualitative disclosures about the sensitivity of recurring Level 3 measurements, and requires the classification of all assets and liabilities measured at fair value in the fair value hierarchy, including those assets and liabilities which are not recorded at fair value but for which fair value is disclosed. The adoption of these changes did not have a material impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued changes to the presentation of comprehensive income. These changes give an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The items that must be reported in other comprehensive income or when an item of other

 

7


The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(unaudited)

1. Basis of Presentation and General Information (Continued)

 

comprehensive income must be reclassified to net income were not changed. These changes became effective for fiscal years beginning after December 15, 2011, except for the reclassification adjustments out of accumulated other comprehensive income that become effective for fiscal years ending after December 15, 2012. The adoption of these changes did not have a material impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued changes that permit an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying value before applying the two-step goodwill impairment model that is currently in place. If it is determined, through the qualitative assessment, that a reporting unit’s fair value is more likely than not greater than its carrying value, the remaining impairment steps would be unnecessary. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment. This update is effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011. The adoption of these changes did not have a material impact on the Company’s consolidated financial statements.

In July 2012, the FASB issued changes that permit an entity to make a qualitative assessment of whether it is more likely than not that an indefinite lived intangible asset is impaired before applying the two-step impairment test that is currently in place. If it is determined through the qualitative assessment that an indefinite lived intangible asset’s fair value is more likely than not greater than its carrying value, the remaining impairment steps would be unnecessary. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment. This update is effective for annual and interim impairment tests performed in fiscal years beginning after September 15, 2012, however, early adoption is permitted. The Company is currently evaluating the impact of adopting these changes.

Certain prior period amounts in the consolidated financial statements, and notes thereto, have been reclassified to conform to current period presentation.

 

8


The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(unaudited)

 

2. Net Income per Common Share

Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. With regard to common stock subject to vesting requirements and restricted stock units issued to employees, the calculation includes only the vested portion of such stock and units.

Dilutive net income per common share is computed by dividing net income by the weighted average number of common shares outstanding, increased by the assumed conversion of other potentially dilutive securities during the period.

The following table reconciles basic and dilutive weighted average common shares:

 

     Quarter Ended      Six Months Ended  
     June 29,
2012
     July 1,
2011
     June 29,
2012
     July 1,
2011
 

Basic weighted average common shares outstanding

     29,290,450         40,016,097         33,907,128         40,211,241   

Effect of dilutive securities:

           

Unvested restricted stock units and common stock subject to vesting requirements issued to employees

     2,159,353         2,167,227         1,759,255         1,740,691   

Common stock issuable upon the exercise of stock options

     58,934         74,917         57,133         64,705   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dilutive weighted average common shares outstanding

     31,508,737         42,258,241         35,723,516         42,016,637   
  

 

 

    

 

 

    

 

 

    

 

 

 

Approximately 3.8 million and 0.9 million shares of common stock equivalents were excluded from the computations of diluted net income per common share for the quarters ended June 29, 2012 and July 1, 2011, respectively, as their inclusion would have had an anti-dilutive effect on diluted net income per common share. This increase in anti-dilutive shares is from the issuance of performance-based options granted during the quarter ended March 30, 2012 (see Note 6 for further detail).

3. Accounts Receivable and Unbilled Revenue, Net

Accounts receivable and unbilled revenue, net, consisted of the following (in thousands):

 

     June 29,
2012
    December 30,
2011
 

Accounts receivable

   $ 28,163      $ 24,731   

Unbilled revenue

     9,748        11,277   

Allowance for doubtful accounts

     (833     (799
  

 

 

   

 

 

 

Accounts receivable and unbilled revenue, net

   $ 37,078      $ 35,209   
  

 

 

   

 

 

 

Accounts receivable is net of uncollected advanced billings. Unbilled revenue includes recognized recoverable costs and accrued profits on contracts for which billings had not been presented to clients.

 

9


The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(unaudited)

 

4. Prepaid Expenses and Other Current Assets

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

 

     June 29,
2012
     December 30,
2011
 

Deferred tax asset, net

   $ 6,654       $ 6,975   

Other

     2,442         2,344   
  

 

 

    

 

 

 

Total prepaid expenses and other current assets

   $ 9,096       $ 9,319   
  

 

 

    

 

 

 

5. Credit Facility

On February 21, 2012, the Company entered into a Credit Facility with Bank of America, N.A. Under the Credit Facility, Bank of America, N.A. agreed to lend the Company up to $20.0 million pursuant to a revolving line of credit (the “Revolver”) and up to $30.0 million pursuant to a term loan (the “Term Loan,” and together with the Revolver, the “Credit Facility”). As of June 29, 2012, the Company had $30.0 million outstanding on the Term Loan and $2.0 million outstanding on the Revolver. Subsequent to June 29, 2012, the Company paid off the Revolver balance in full.

The obligations of the Company under the Credit Facility are guaranteed by active existing and future material U.S. subsidiaries of the Company and are secured by substantially all of the existing and future property and assets of the Company (subject to certain exceptions).

The interest rates per annum applicable to loans under the Credit Facility will be, at the Company’s option, equal to either a base rate or a LIBOR base rate, plus an applicable margin percentage. The applicable margin percentage is based on the consolidated leverage ratio. Through June 29, 2012, the applicable margin percentage was 2.0% per annum based on the consolidated leverage ratio, in the case of LIBOR rate advances, and 1.25% per annum, in the case of base rate advances.

The Revolver matures on February 21, 2017, and the Term Loan requires amortization principal payments in equal quarterly installments beginning October 1, 2012 through February 21, 2017. The Company is subject to certain covenants and exceptions, including total consolidated leverage, fixed cost coverage and liquidity requirements.

6. Stock Based Compensation

During the six months ended June 29, 2012, the Company issued 1,382,999 restricted stock units at a weighted average grant-date fair value of $3.91 per share. As of June 29, 2012, the Company had 3,050,869 restricted stock units outstanding at a weighted average grant-date fair value of $3.68 per share. As of June 29, 2012, $7.1 million of total restricted stock unit compensation expense related to nonvested awards had not been recognized and is expected to be recognized over a weighted average period of 2.33 years.

As of June 29, 2012, the Company had 552,839 shares of common stock subject to vesting requirements outstanding at a weighted average grant-date fair value of $3.40 per share. As of June 29, 2012, $0.8 million of compensation expense related to common stock subject to vesting requirements had not been recognized and is expected to be recognized over a weighted average period of 1.57 years.

During the quarter ended March 30, 2012, the Company’s Board of Directors’ Compensation Committee approved the exchange of one-half of the existing restricted stock unit executive bonus opportunity for the fiscal years 2012 through 2015 for one-time performance-based stock option grants of 3,144,563 options, each with an exercise price of $4.00 per share. These performance-based stock option grants vest one-half upon the achievement of at least 50% growth (from fiscal year 2011) of pro forma earnings per share (as defined) and the remaining half vests upon the achievement of at least 50% growth of pro forma EBITDA (as defined). Each metric can be achieved at any time during the six-year term of the award based on a trailing twelve month period measured quarterly.

As of June 29, 2012, the Company had 3,881,314 options outstanding, of which 82% were performance-based, at a weighted average exercise price of $4.34 per share. Although the targets for the performance-based options have not been achieved, the Company has recorded non-cash compensation expense of $0.2 million and $0.3 million in the quarter and six months ended June 29, 2012, respectively related to these options.

 

10


The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(unaudited)

 

7. Shareholders’ Equity

Tender Offer

On March 21, 2012, the Company completed a tender offer to purchase 11.0 million shares of its common stock at a purchase price of $5.00 per share, for an aggregate cost of approximately $55.0 million, excluding fees and expenses relating to the tender offer. The 11.0 million shares accepted for purchase represented approximately 27% of the Company’s issued and outstanding shares of common stock at that time.

Share Repurchase Plan

Under the Company’s share repurchase plan, the Company may buy back shares of its outstanding stock either on the open market or through privately negotiated transactions subject to market conditions and trading restrictions. During the quarter and six months ended June 29, 2012, the Company did not repurchase any shares of its common stock through its share repurchase plan. As of June 29, 2012, the Company had $0.6 million available under its share repurchase plan.

8. Litigation

The Company is involved in legal proceedings, claims, and litigation arising in the ordinary course of business not specifically discussed herein. In the opinion of management, the final disposition of such matters will not have a material adverse effect on the Company’s financial position, cash flows or results of operations.

9. Geographic and Group Information

Revenue is primarily based on the country of the contracting entity and was attributed to the following geographical areas (in thousands):

 

     Quarter Ended      Six Months Ended  
     June 29,
2012
     July 1,
2011
     June 29,
2012
     July 1,
2011
 

Revenue:

           

North America

   $   48,186       $   46,149       $ 93,219       $ 88,211   

International (primarily European countries)

     13,098         12,660         25,083         23,460   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 61,284       $ 58,809       $   118,302       $   111,671   
  

 

 

    

 

 

    

 

 

    

 

 

 

Long-lived assets are attributable to the following geographic areas (in thousands):

 

     June 29,
2012
     December 30,
2011
 

Long-Lived Assets:

     

North America

   $   74,493       $ 73,449   

International (primarily European countries)

     15,721         15,628   
  

 

 

    

 

 

 

Total long-lived assets

   $ 90,214       $ 89,077   
  

 

 

    

 

 

 

As of June 29, 2012, foreign assets included $15.1 million of goodwill related to the Archstone and REL acquisitions and $0.1 million of intangible assets, related to the Archstone acquisition. As of December 30, 2011, foreign assets included $14.9 million of goodwill related to the REL and Archstone acquisitions and $0.1 million of intangible assets related to the Archstone acquisition.

 

11


The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(unaudited)

9. Geographic and Group Information (Continued)

 

The Company’s revenue was derived from the following service groups (in thousands):

 

     Quarter Ended      Six Months Ended  
     June 29,
2012
     July 1,
2011
     June 29,
2012
     July 1,
2011
 

The Hackett Group

   $ 50,104       $ 46,790       $ 97,228       $ 89,606   

ERP Solutions

     11,180         12,019         21,074         22,065   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 61,284       $ 58,809       $ 118,302       $ 111,671   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

12


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report and the information incorporated by reference in it include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements. All statements regarding our expected financial position and operating results, our business strategy, our financing plans and forecasted demographic and economic trends relating to our industry are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as “may,” “will,” “anticipate,” “estimate,” “expect,” or “intend” and similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. We cannot promise you that our expectations reflected in such forward-looking statements will turn out to be correct. Factors that impact such forward-looking statements include, among others, our ability to effectively integrate acquisitions into our operations, our ability to retain existing business, our ability to attract additional business, our ability to effectively market and sell our product offerings and other services, the timing of projects and the potential for contract cancellation by our customers, changes in expectations regarding the business consulting and information technology industries, our ability to attract and retain skilled employees, possible changes in collections of accounts receivable due to the bankruptcy or financial difficulties of our customers, risks of competition, price and margin trends, foreign currency fluctuations and changes in general economic conditions and interest rates. An additional description of our risk factors is set forth in our Annual Report on Form 10-K for the year ended December 30, 2011. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

OVERVIEW

The Hackett Group, Inc. (“Hackett” or the “Company”) is a leading strategic advisory and technology consulting firm that enables companies to achieve world-class business performance. By leveraging the proprietary Hackett benchmarking database, the world’s leading repository of enterprise business process performance metrics and best practice intellectual capital, our business and technology solutions help clients optimize performance and returns on business transformation investments.

Hackett, formed on April 23, 1997, is a strategic advisory firm and a world leader in best practice research, benchmarking, business transformation and working capital management services that empirically defines and enables world-class enterprise performance. Only Hackett empirically defines world-class performance in sales, general and administrative and supply chain activities with analysis gained through more than 7,000 benchmark studies over 18 years at over 3,000 of the world’s leading companies.

Hackett’s combined capabilities include executive advisory programs, benchmarking, business transformation, working capital management and technology solutions, with corresponding offshore support.

In the following discussion, “The Hackett Group” encompasses our Benchmarking, Business Transformation, Executive Advisory groups and EPM Technologies. “ERP Solutions” encompasses our ERP Technology groups, which include SAP and Oracle.

 

13


Results of Operations

The following table sets forth, for the periods indicated, our results of operations and the percentage relationship to revenue before reimbursements of such results (in thousands):

 

     Quarter Ended     Six Months Ended  
     June 29, 2012     July 1, 2011     June 29, 2012     July 1, 2011  

Revenue:

                  

Revenue before reimbursements

   $ 54,242        100.0   $ 52,382         100.0   $ 105,832        100.0   $ 99,339         100.0

Reimbursements

     7,042          6,427           12,470          12,332      
  

 

 

     

 

 

      

 

 

     

 

 

    

Total revenue

     61,284          58,809           118,302          111,671      

Costs and expenses:

                  

Cost of service:

                  

Personnel costs before reimbursable expenses

     34,629        63.8     32,815         62.6     67,778        64.0     63,075         63.5

Reimbursable expenses

     7,042          6,427           12,470          12,332      
  

 

 

     

 

 

      

 

 

     

 

 

    

Total cost of service

     41,671          39,242           80,248          75,407      

Selling, general and administrative costs

     15,123        27.9     15,064         28.8     29,905        28.3     28,275         28.5
  

 

 

     

 

 

      

 

 

     

 

 

    

Total costs and operating expenses

     56,794          54,306           110,153          103,682      
  

 

 

     

 

 

      

 

 

     

 

 

    

Income from operations

     4,490        8.3     4,503         8.6     8,149        7.7     7,989         8.0

Other income (expense):

                  

Interest, net

     (239     -0.5     12         0.0     (257     -0.2     13         0.1
  

 

 

     

 

 

      

 

 

     

 

 

    

Income before income taxes

     4,251        7.8     4,515         8.6     7,892        7.5     8,002         8.1

Income taxes

     406        0.7     112         0.2     514        0.5     272         0.3
  

 

 

     

 

 

      

 

 

     

 

 

    

Net income

   $ 3,845        7.1   $ 4,403         8.4   $ 7,378        7.0   $ 7,730         7.8
  

 

 

     

 

 

      

 

 

     

 

 

    

Revenue. We are a global company with operations located primarily in the United States and Western Europe. Our revenue is denominated in multiple currencies, primarily the U.S. Dollar, British Pound, Euro and Australian Dollar, and as a result is affected by currency exchange rate fluctuations. The exchange rate fluctuations had an impact on our revenue comparisons between the quarters and six months ended June 29, 2012 and July 1, 2011; therefore, in the following revenue discussion we will disclose The Hackett Group revenue variances based on the U.S. Dollar reporting currency, as well as variances excluding the impact of currency fluctuations, otherwise referred to below as constant currency. Hackett Technology Solutions was not materially impacted by foreign currency rate fluctuations.

Total Company revenue increased 4% (or 6% in constant currency) and 6% (or 7% in constant currency) for the quarter and six months ended June 29, 2012, respectively, as compared to the quarter and six months ended July 1, 2011. The following table summarizes revenue (in thousands):

 

     Quarter Ended      Six Months Ended  
     June 29,
2012
     July 1,
2011
     June 29,
2012
     July 1,
2011
 

The Hackett Group

   $ 50,104       $ 46,790       $ 97,228       $ 89,606   

ERP Solutions

     11,180         12,019         21,074         22,065   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 61,284       $ 58,809       $ 118,302       $ 111,671   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Hackett Group revenue increased by 7% (or 10% in constant currency) and 9% (or 10% in constant currency) for the quarter and six months ended June 29, 2012, respectively, as compared to the quarter and six months ended July 1, 2011. The Hackett Group’s international revenue, which is primarily based on the country of the contracting entity, accounted for 21% (or 24% in constant currency) and 21% (or 23% in constant currency) of total Company revenue for the quarter and six months ended June 29, 2012, as compared to 22% and 21% for the quarter and six months ended July 1, 2011, respectively.

ERP Solutions revenue decreased 7% and 4% for the quarter and six months ended June 29, 2012, respectively, as compared to the quarter and six months ended July 1, 2011, primarily due to lower market demand in the Oracle ERP group.

During the quarter and six months ended June 29, 2012, one customer accounted for 5% of our total Company revenue and during the quarter and six months ended July 1, 2011, no customer accounted for more than 5% of our total Company revenue.

 

14


Cost of Service. Cost of service primarily consists of salaries, benefits and incentive compensation for consultants, subcontractor fees and reimbursable expenses associated with projects. Cost of service before reimbursable expenses increased 6%, or $1.8 million, and 7% or $4.7 million for the quarter and six months ended June 29, 2012, respectively, as compared to the quarter and six months ended July 1, 2011, primarily due to the increased headcount to align resources with market demand.

Total cost of service before reimbursable expenses, as a percentage of revenue before reimbursements, was 64% for both the quarter and six months ended June 29, 2012, as compared to 63% and 64% for the quarter and six months ended July 1, 2011, respectively. As a percentage of revenue before reimbursements, The Hackett Group generated gross margins of 39% for both the quarter and six months ended June 29, 2012, as compared to ERP Solutions, which generated gross margins of 34% and 31% for the same periods, respectively.

Selling, General and Administrative. Selling, general and administrative costs were $15.1 million and $29.9 million for the quarter and six months ended June 29, 2012, respectively, and $15.1 million and $28.3 million for the quarter and six months ended July 1, 2011, respectively. Selling, general and administrative costs as a percentage of revenue before reimbursements decreased to 28% for both the quarter and six months ended June 29, 2012, as compared to 29% for both the quarter and six months ended July 1, 2011, primarily due to selling, general and administrative leverage on increased revenue.

Income Taxes. We recorded income tax expense of $406 thousand and $514 thousand for the quarter and six months ended June 29, 2012, respectively, which reflected an estimated annual tax rate of 9.6% and 6.5%, respectively, for certain federal, foreign and state taxes. For the quarter and six months ended July 1, 2011, we recorded income tax expense of $112 thousand and $272 thousand, respectively, which reflected an estimated annual tax rate of 2.5% and 3.4%, respectively, for certain federal and state taxes. During the quarter ended June 29, 2012, we released the remaining balance of our U.S. federal valuation allowance. As this balance did not offset our U.S. federal tax for the quarter, an additional $0.2 million of U.S. federal tax expense was recorded.

Liquidity and Capital Resources

As of June 29, 2012 and December 30, 2011, we had $13.8 million and $32.9 million, respectively, classified in cash and cash equivalents in the accompanying consolidated balance sheets. During these same periods, we had $0.7 million and $0.9 million, respectively, on deposit with financial institutions that primarily served as collateral for amounts related to employee agreements. These deposit accounts have been classified as restricted cash on the consolidated balance sheets.

The following table summarizes our cash flow activity (in thousands):

 

     Six Months Ended  
     June 29,
2012
    July 1,
2011
 

Cash flows from operating activities

   $ 6,276      $ 1,636   

Cash flows from investing activities

   $ (1,901   $ (3,336

Cash flows from financing activities

   $ (23,630   $ (5,725

Cash Flows from Operating Activities

Net cash provided by operating activities was $6.3 million for the six months ended June 29, 2012, as compared to $1.6 million for the six months ended July 1, 2011. The increase in cash flows is primarily due to the benefit of the increase in sales, decrease in days sales outstanding and lower payout of incentive compensation awards during the six months ended June 29, 2012, as compared to the six months ended July 1, 2011.

Cash Flows from Investing Activities

Net cash used in investing activities was $1.9 million for the six months ended June 29, 2012, as compared to $3.3 million for the six months ended July 1, 2011. During the six months ended June 29, 2012 and July 1, 2011, cash used in investing activities primarily related to capital expenditures for the Hackett Performance Exchange development. In addition, during the six months ended July 1, 2011, cash used in investing activities included the global rollout of new laptops which occurs every three to four years.

Cash Flows from Financing Activities

On March 21, 2012, we completed a tender offer to purchase 11.0 million shares of our common stock at a purchase price of $5.00 per share, for an aggregate cost of approximately $55.0 million, excluding fees and expenses related to the tender offer.

On February 21, 2012, we entered into a Credit Facility with Bank of America, N.A. Under the Credit Facility, Bank of America, N.A. agreed to lend us up to $20.0 million from time to time pursuant to a revolving line of credit and up to $30.0 million pursuant to a term loan (the “Credit Facility”). We utilized $40.0 million of proceeds from the Credit Facility, along with cash on hand, for the purchase of the shares in the tender offer and the payment of all fees and expenses in connection with the tender offer.

 

15


Net cash used in financing activities was $23.6 million for the six months ended June 29, 2012, as compared to $5.7 million for the six months ended July 1, 2011. The increase in the cash used was primarily attributable to the funding of the tender offer and the pay down of the revolving line of credit.

We currently believe that available funds (including the cash on hand and funds available for borrowing under the revolving line of credit of $18.0 million as of June 29, 2012) and cash flows generated by operations will be sufficient to fund our working capital and capital expenditure requirements for at least the next twelve months. We may decide to raise additional funds in order to fund expansion, to develop new or further enhance products and services, to respond to competitive pressures, or to acquire complementary businesses or technologies. There is no assurance, however, that additional financing will be available when needed or desired.

Contractual Obligations

During the six months ended June 29, 2012, we incurred certain long-term debt obligations pursuant to the Credit Agreement entered into with Bank of America, N.A. For additional information about the Credit Agreement, please see “Liquidity and Capital Resources” above and Note 5, “Credit Facility,” to our consolidated financial statements included in this report.

Recently Issued Accounting Standards

For discussion of recently issued accounting standards, please see Note 1, “Basis of Presentation,” to our consolidated financial statements included in this report.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

At June 29, 2012, our exposure to market risk related primarily to changes in interest rates and foreign currency exchange rate risks.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to the Credit Facility, which is subject to variable interest rates. The interest rates per annum applicable to loans under the Credit Facility will be, at our option, equal to either a base rate or a LIBOR rate for one-, two-, three- or six-month interest periods chosen by us in each case, plus an applicable margin percentage. A 100 basis point increase in our interest rate under our Credit Facility would not have had a material impact on our second quarter 2012 results of operations.

Exchange Rate Sensitivity

We face exposure to adverse movements in foreign currency exchange rates as a portion of our revenue, expenses, assets and liabilities are denominated in currencies other than the U.S. Dollar, primarily the British Pound, the Euro and the Australian Dollar. These exposures may change over time as business practices evolve.

 

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Controls

There were no changes in our internal controls over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

16


PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings.

The Company is involved in legal proceedings, claims, and litigation arising in the ordinary course of business not specifically discussed herein. In the opinion of management, the final disposition of such matters will not have a material adverse effect on the Company’s financial position, cash flows or results of operations.

 

Item 1A. Risk Factors.

There have been no material changes to any of the risk factors disclosed in the Company’s most recently filed Annual Report on Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

No shares were repurchased during the quarter under the Company’s Board of Director approved share repurchase plan. As of June 29, 2012, the Company had $0.6 million of remaining authorization under this program.

Issuer Purchases of Equity Securities

 

Period

   Total Number
of Shares
     Average Price
Paid per Share
     Total Number
of Shares as Part
of Publicly
Announced
Program
     Maximum Dollar
Value That May
Yet be Purchased
Under the
Program
 

Balance as of March 30, 2012

     —         $ —           —         $ 556,258   

March 31, 2012 to April 27, 2012

     —         $ —           —         $ 556,258   

April 28, 2012 to May 25, 2012

     —         $ —           —         $ 556,258   

May 26, 2012 to June 29, 2012

     —         $ —           —         $ 556,258   
  

 

 

    

 

 

    

 

 

    
     —         $ —           —        
  

 

 

    

 

 

    

 

 

    

 

Item 6. Exhibits.

See Index to Exhibits on page 19, which is incorporated herein by reference.

The Exhibits listed in the accompanying Index to Exhibits are filed as part of this report, with the exception of interactive data filed deemed not filed pursuant to Rule 406T of Regulation S-T.

 

17


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

      The Hackett Group, Inc.
Date: August 7, 2012      

/s/ Robert A. Ramirez

      Robert A. Ramirez
      Executive Vice President, Finance and Chief Financial Officer

 

18


INDEX TO EXHIBITS

 

Exhibit

No.

 

Exhibit Description

  10.1   Credit Agreement, dated as of February 21, 2012, among The Hackett Group, Inc., the material domestic subsidiaries of Hackett named on the signature pages thereto and Bank of America, N.A., as lender (incorporated by reference to the Registrant’s Form 8-K filed on February 23, 2012).
  31.1   Certification by CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (exhibits filed herewith).
  31.2   Certification by CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (exhibits filed herewith).
  32   Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (exhibits filed herewith).
101.INS**   XBRL Instance Document
101.SCH**   XBRL Taxonomy Extension Schema
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase
101.DEF**   XBRL Taxonomy Extension Definition Linkbase
101.LAB**   XBRL Taxonomy Extension Label Linkbase
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase

 

** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

 

19

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