ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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, interest rates and our ability to obtain debt financing through additional borrowings under an amendment to our existing credit facility. An additional description of our risk factors is set forth in our Annual Report on Form 10-K for the year ended
December 30, 2016
. 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 comprehensive Hackett database, the world’s leading repository of enterprise business process performance metrics and best practice intellectual capital, our business and technology solutions help clients improve performance and maximize returns on technology investments. Only Hackett empirically defines world-class performance in sales, general and administrative and certain supply chain activities with analysis gained through more than 13,000 benchmark studies over 23 years at over 5,100 of the world’s leading companies.
In the following discussion, “The Hackett Group” encompasses our Benchmarking, Business Transformation, Executive Advisory, Enterprise Performance Management ("EPM") and EPM Application Maintenance and Support ("AMS") groups. “ERP Solutions” encompasses our SAP ERP Implementation and SAP Maintenance groups.
RESULTS OF OPERATIONS
Adjusted non-GAAP information is provided to enhance the understanding of the Company’s financial performance and is reconciled to the Company’s GAAP information in the tables below. In our quarterly earnings announcements, we refer to adjusted non-GAAP information as “pro-forma”, which is unaudited. We also present earnings before income taxes, interest, depreciation and amortization expense
(EBITDA)
, and other one-time acquisition-related expense (
Adjusted
EBITDA), both of which are non-GAAP measures.
References to adjusted non-GAAP results
below
specifically exclude non-cash stock compensation expense, intangible asset amortization expense, other one-time acquisition related income and expense, restructuring charges and assumes a normalized long-term cash tax rate.
All non-GAAP information presented herein should be considered in addition to, and not as substitute for or superior to, any measure of performance, cash flows, or liquidity prepared in accordance with GAAP.
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):
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Quarter Ended
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March 31,
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April 1,
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2017
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2016
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Revenue:
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(unaudited)
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Revenue before reimbursements
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$
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65,069
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100.0%
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$
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61,973
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100.0%
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Reimbursements
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6,360
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6,805
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Total revenue
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71,429
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68,778
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Costs and expenses:
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Cost of service:
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Personnel costs before reimbursable expenses
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40,152
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61.7%
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38,351
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61.9%
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Non-cash stock compensation expense
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1,132
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1,047
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Acquisition-related non-cash stock compensation expense
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310
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268
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Reimbursable expenses
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6,360
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6,805
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Total cost of service
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47,954
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46,471
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Selling, general and administrative costs
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14,360
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22.1%
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14,195
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22.9%
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Non-cash stock compensation expense
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659
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597
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Acquisition-related costs
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106
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—
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Amortization of intangible assets
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386
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275
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Total selling, general, and administrative expenses
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15,511
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15,067
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Total costs and operating expenses
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63,465
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61,538
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Income from operations
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7,964
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12.2%
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7,240
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11.7%
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Other expense:
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Interest expense
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(90)
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(41)
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Income from operations before income taxes
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7,874
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12.1%
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7,199
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11.6%
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Income tax expense
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—
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0.0%
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2,817
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4.5%
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Net income
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$
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7,874
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12.1%
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$
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4,382
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7.1%
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Diluted net income per common share
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$
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0.24
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$
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0.13
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Adjusted non-GAAP data (unaudited):
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Income from operations before income taxes
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$
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7,874
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$
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7,199
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Non-cash stock compensation expense
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1,791
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1,644
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Acquisition-related non-cash stock compensation expense
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310
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268
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Acquisition-related costs
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106
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—
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Amortization of intangible assets
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386
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275
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Adjusted non-GAAP income before income taxes
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10,467
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9,386
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Adjusted non-GAAP income tax expense
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3,140
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30.0%
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2,816
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30.0%
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Adjusted non-GAAP net income
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$
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7,327
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$
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6,570
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Adjusted non-GAAP diluted net income per share
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$
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0.23
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$
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0.20
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EBITDA:
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Income from operations before income taxes
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7,874
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7,199
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Interest expense
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90
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41
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Depreciation expense
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639
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637
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Amortization of intangible assets
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386
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275
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EBITDA
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$
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8,989
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$
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8,152
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Reconciliation to adjusted non-GAAP EBITDA:
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EBITDA
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8,989
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8,152
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Non-cash stock compensation expense
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1,791
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1,644
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Acquisition-related non-cash stock compensation expense
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310
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268
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Acquisition-related costs
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106
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—
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Adjusted non-GAAP EBITDA
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$
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11,196
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$
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10,064
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Overview.
References to adjusted non-GAAP results specifically exclude non-cash stock compensation expense, intangible asset amortization expense, acquisition related charges and assumes a normalized long-term cash tax rate of 30%.
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 impact of currency fluctuations did not have a significant impact on comparisons between the first quarter of 2017 and the first quarter of 2016. Revenue is analyzed based on geographical location of engagement team personnel.
Our total Company revenue increased 4%
, or 5% in constant currency
, to $71.4 million in the first quarter of 2017, as compared to $68.8 million in the first quarter of 2016.
In 2017 and 2016, no one customer accounted for more than 5% of our total revenue.
The Hackett Group total revenue increased 4%
, or 5% in constant currency
, to $60.2 million during the first quarter of 2017, as compared to $57.9 million in the first quarter of 2016.
Hackett domestic revenue was down 2% as revenue was adversely impacted as a result of the acceleration of the transition
from
on premise to cloud application migration activity and slightly lower than anticipated activity in our other Hackett domestic practices. The decrease of the domestic Hackett revenue was offset by strong Hackett international growth of 38%, primarily in Europe, as compared to prior year.
ERP Solutions total revenue increased approximately 3%, to $11.2 million, during the first quarter of 2017, as compared $10.8 million in the first quarter of 2016.
Total Company intern
ational revenue accounted for 17
%
, or 18% in constant currency,
of total Company revenue in the first quarter of 2017, as compared to 13% in the first quarter of 2016.
Reimbursements as a percentage of total revenue were 9% during the first quarter of 2017, as compared to 10% during the first quarter of 2016, primarily due to the impact of project mix on revenue.
Reimbursements are engagement travel related expenses which are billed to clients and have no impact on profitability.
Cost of Service.
Cost of service primarily consists of salaries, benefits and incentive compensation for consultants and subcontractor fees; acquisition-related compensation costs; non-cash stock compensation expense; and reimbursable expenses associated with projects.
Personnel costs increased 5%, to $40.2 million, for the first quarter of 2017, from $38.4 million
in the first quarter of 2016. The increase in absolute dollar was primarily a result of increased employee headcount to support increasing revenue, partially offset by lower incentive compens
ation accruals
. Adjusted non-GAAP personnel costs before reimbursable expenses
, as a percentage of revenue before reimbursements, were 62% for the both the first quarter of 2017 and 2016.
Total company adjusted non-GAAP gross margin was 38% of net revenue in the both the first quarter of 2017 and 2016.
Selling, General and Administrative Costs (SG&A)
. SG&A excluding non-cash compensation expense and the amorti
zation of intangible assets was
$14.4 million for the first quarter of 2017, as compared to $14.2 million for the first quarter of
2016, respectively. SG&A
as a percentage of re
venue before reimbursements was
22% for the first quarter of 2017, as compared to 23% for the first quarter of 2016 due to
the improved leverage from
increased revenue.
Non-cash compensation expense included in total SG&A increased to $0.7 million in the first quarter of 2017, as compared to $0.6 million in the f
irst quarter of 2016. See Note 6
, “Stock Based Compensation” to our consolidated financial statements included in this Quarterly Form 10-Q.
Amortization expense was $0.4 million in the first quarter of 2017, as compared to $0.2 million in the first quarter of 2016. The amortization expense in 2017 and 2016 relates to the amortization of the intangible assets acquired in our 2014 EPM AMS acquisition of Technolab. The intangibles relate to the customer relationship and non-compete agreement and will continue to amortize through 2018.
Income Taxes.
In the first quarter of 2017, we recorded no income tax expense as a result of
the adoption of a new pronouncement relating to the accounting on the
vesting of share-based awards. Excluding
the effect of the new pronouncement
, the effective tax rate would have been 35.0% for certain federal, foreign and state taxes. In 2016, we recorded income tax expense of $2.8 million, which reflected an effective tax rate of 39.1% for certain federal, foreign and state taxes.
Liquidity and Capital Resources
As of March 31, 2017 and December 30, 2016, we had $17.
1
million and $23.5 million, respectively, classified in cash and cash equivalents on the consolidated balance sheets. We currently believe that available funds (including the cash on hand and funds available for borrowing capacity under the Revolver), and cash flows generated by operations will be sufficient to fund our working capital and capital expenditure requirements for at least the next twelve months. We may decide to raise additional funds in order to fund expansion,
to develop new or further enhance products and services, to respond to competitive pressures, or to acquire complementary businesses or technologies. There is no assurance, however, that additional financing will be available when needed or desired.
The following table summarizes our cash flow activity (in thousands):
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Quarter Ended
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March 31,
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April 1,
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2017
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2016
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Cash flows provided by operating activities
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$
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4,876
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$
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536
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Cash flows used in investing activities
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$
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(1,634)
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$
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(487)
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Cash flows used in financing activities
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$
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(5,894)
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$
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(10,892)
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Cash Flows from Operating Activities
Net cash provided by operating activities was $4.9 million during the quarter ended March 31, 2017, as compared to $0.5 million during the quarter ended April 1, 201
6
. In 2017 and 2016, the net cash provided by operating activities was primarily due to net income adjusted for non-cash items and increased accounts payable related to higher vendor accruals, mostly offset by a decrease in accrued expenses and other liabilities, primarily as a result of the payout of incentive compensation, and an increase in accounts receivable and unbilled revenue.
In
2017 and
2016
,
net cash provided by operating activities was further impacted by a decrease in income taxes payable.
Cash Flows from Investing Activities
Net cash used in investing activities was $1.6 million and $0.5 million during the quarters ended March 31, 2017 and April 1, 2016, respectively. Net cash used in investing activities during the both quarters was primarily due to capital expenditures on the continued development of our benchmark technology.
Additionally, during the quarter ended March 31, 2017, cash flows used in investing activities also included investments relating to the development of the Hackett Academy, as well as further investments in internal corporate systems.
Cash Flows from Financing Activities
Net cash used in financing activities was $5.9 million and $10.9 million during the quarters ended March 31, 2017 and April 1, 2016, respectively. The usage of cash in 2017 was primarily related to the payment of the second
2016
semi-
annual dividend of $4.0 million, the cost of share purchases to satisfy employee net vesting requirements of $2.9 million and the repurchase of $1.
2
million of Company
common
stock, partially offset by the net $2.0 million drawdown on the
Revolver (as defined below)
. The usage of cash in 2016 was primarily related to the cost of share purchases to satisfy employee net vesting requirements of $3.4 million and the repurchase of $4.3 million of Company
common
stock under the Company’s share repurchase program.
The Company is party to a credit agreement with Bank of America, N.A
, dated as of May 9, 2016 (the “Credit Agreement”)
. The Credit Agreement provides for a revolving line of credit (the “Revolver”). As of March 31, 2017, we had a remaining capacity under our Revolver of $36.0 million. See Note 5, "Credit Facility," to our consolidated financial statements included in this Quarterly Report on Form 10-Q for more information.
Recently Issued Accounting Standards
For a discussion of recently issued accounting standards, see Note 1, "Basis of Presentation and General Information," to our consolidated financial statements included in this Quarterly Report on Form 10-Q and Note 1, "Basis of Presentation and General Information," to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 30, 2016.