Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended April 3, 2015

☐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 ☒ 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 ☒ 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	☒

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 ☒

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

As of May 7, 2015, there were 29,696,698 shares of common stock outstanding.

The Hackett Group, Inc.

TABLE OF CONTENTS





PART I - FINANCIAL INFORMATION		Page

Item 1.	Financial Statements

	Consolidated Balance Sheets as of April 3, 2015 and January 2, 2015 (unaudited)	3

	Consolidated Statements of Operations for the Quarters Ended April 3, 2015 and March 28, 2014 (unaudited)	4

	Consolidated Statements of Comprehensive Income for the Quarters Ended April 3, 2015 and
	March 28, 2014 (unaudited)	5

	Consolidated Statements of Cash Flows for the Quarters Ended April 3, 2015 and March 28, 2014 (unaudited)	6

	Notes to Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15

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

PART I — FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

The Hackett Group, Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)



	April 3,		January 2,
	2015		2015
ASSETS
Current assets:
Cash and cash equivalents	$	10,820	$	14,608
Accounts receivable and unbilled revenue, net of allowance of $1,251 and $1,330 at
April 3, 2015 and January 2, 2015, respectively		42,236		37,421
Deferred tax asset, net		2,495		2,828
Prepaid expenses and other current assets		2,294		2,199
Total current assets		57,845		57,056

Property and equipment, net		13,804		13,753
Other assets		5,966		6,548
Goodwill, net		74,658		75,429
Total assets	$	152,273	$	152,786

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	5,422	$	7,909
Accrued expenses and other liabilities		31,331		30,901
Current portion of long-term debt		1,661		-
Total current liabilities		38,414		38,810
Long-term deferred tax liability, net		7,056		5,925
Long-term debt		16,602		18,263
Total liabilities		62,072		62,998

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; 53,811,051 and 53,203,395
shares issued at April 3, 2015 and January 2, 2015, respectively		53		53
Additional paid-in capital		264,308		264,912
Treasury stock, at cost, 24,064,835 and 23,989,776 shares April 3, 2015 and
January 2, 2015, respectively		(91,988)		(91,335)
Accumulated deficit		(74,672)		(77,677)
Accumulated comprehensive loss		(7,500)		(6,165)
Total shareholders' equity		90,201		89,788
Total liabilities and shareholders' equity	$	152,273	$	152,786

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

The Hackett Group, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



	Quarter Ended
	April 3,		March 28,
	2015		2014
Revenue:
Revenue before reimbursements	$	54,905	$	49,418
Reimbursements		6,069		5,487
Total revenue		60,974		54,905
Costs and expenses:
Cost of service:
Personnel costs before reimbursable expenses (includes $1,309 and $686
of stock compensation expense in the quarters ended April 3, 2015
and March 28, 2014, respectively)		34,946		34,184
Reimbursable expenses		6,069		5,487
Total cost of service		41,015		39,671
Selling, general and administrative costs (includes $515 and $653 of stock
compensation expense in the quarters ended April 3, 2015 and
March 28, 2014, respectively)		15,324		14,235
Bargain purchase gain from acquisition		—		(3,015)
Restructuring costs		—		3,604
Total costs and operating expenses		56,339		54,495
Income from operations		4,635		410

Other income (expense):
Interest income		2		1
Interest expense		(140)		(124)
Income from operations before income taxes		4,497		287
Income tax expense (benefit)		1,492		(118)
Net income	$	3,005	$	405

Basic net income per common share:
Income per common share from operations	$	0.11	$	0.01
Weighted average common shares outstanding		28,552		29,120

Diluted net income per common share:
Income per common share from operations	$	0.10	$	0.01
Weighted average common and common equivalent shares outstanding		29,917		29,869

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

The Hackett Group, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)



	Quarter Ended
	April 3,		March 28,
	2015		2014
Net income	$	3,005	$	405
Foreign currency translation adjustment		(1,336)		379
Total comprehensive income	$	1,669	$	784

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

The Hackett Group, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Quarter Ended
	April 3,		March 28,
	2015		2014
Cash flows from operating activities:
Net income	$	3,005	$	405
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation expense		612		654
Amortization expense		547		551
Amortization of debt issuance costs		14		23
Non-cash compensation expense		1,825		1,339
Bargain purchase gain from acquisition		—		(3,015)
Restructuring costs		—		3,604
Provision for doubtful accounts		159		253
Loss on foreign currency translation		206		46
Changes in assets and liabilities, net of effects from acquisitions:
Increase in accounts receivable and unbilled revenue		(5,136)		(1,262)
Increase in prepaid expenses and other assets		(74)		(392)
Decrease in accounts payable		(2,487)		(3,038)
Decrease in accrued expenses and other liabilities		(1,076)		(7,155)
Net cash used in operating activities		(2,405)		(7,987)

Cash flows from investing activities:
Purchases of property and equipment		(725)		(443)
Cash consideration paid for acquisition		—		(2,700)
Cash acquired in acquisition of business		—		522
Increase in restricted cash		—		(300)
Net cash used in investing activities		(725)		(2,921)

Cash flows from financing activities:
Proceeds from issuance of common stock		—		254
Proceeds from borrowings		—		9,500
Repurchases of common stock		(653)		(4,363)
Net cash (used in) provided by financing activities		(653)		5,391

Effect of exchange rate on cash		(6)		12

Net decrease in cash and cash equivalents		(3,788)		(5,505)
Cash and cash equivalents at beginning of year		14,608		18,199
Cash and cash equivalents at end of period	$	10,820	$	12,694

Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	164	$	413
Cash paid for interest	$	122	$	107

Supplemental disclosure of non-cash investing and financing activities:
Shares issued to Sellers of acquired business	$	—	$	1,000

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

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 January 2, 2015, included in the Annual Report on Form 10-K filed by the Company with the SEC. The consolidated results of operations for the quarter ended April 3, 2015, 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, accounts receivable and unbilled revenue, accounts payable, accrued expenses and other liabilities and debt. As of April 3, 2015 and January 2, 2015, the carrying amount of each financial instrument, with the exception of debt, approximated the instrument’s 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.

Business Combinations

The Company applies the provisions of ASC 805, Business Combinations, in the accounting for its acquisitions, which requires recognition of the assets acquired and the liabilities assumed at their acquisition date fair values, separately from goodwill. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition date fair values of the tangible and identifiable intangible assets acquired and liabilities assumed. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, its estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, that may be up to 12 months from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with a corresponding adjustment to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, the impact of any subsequent adjustments is included in the consolidated statements of operations.

Recently Issued Accounting Standards

In May 2014, the FASB issued guidance on revenue recognition, which provides for a single, principles-based model for revenue recognition and replaces the existing revenue recognition guidance. The guidance is effective for annual and interim periods beginning on or after December 15, 2016 and will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective. It permits the use of either a retrospective or cumulative effect transition method and early adoption is not permitted. The Company has not yet selected a transition method and is in the process of evaluating the effect this standard will have on its consolidated financial statements and related disclosures.

The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation and General Information (continued)

Reclassifications

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

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 the Company’s employees and non-employee members of its Board of Directors, 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
	April 3,	March 28,
	2015	2014

Basic weighted average common shares outstanding	28,551,665	29,119,505

Effect of dilutive securities:
Unvested restricted stock units and common stock subject to
vesting requirements issued to employees and non-employees	847,951	739,752
Common stock issuable upon the exercise of stock options	517,700	9,445
Dilutive weighted average common shares outstanding	29,917,316	29,868,702

Approximately 0.6 million and 0.4 million shares of common stock equivalents were excluded from the computations of diluted net income per common share for the quarters ended April 3, 2015 and March 28, 2014, respectively, as their inclusion would have had an anti-dilutive effect on diluted net income per common share.

3. Accounts Receivable and Unbilled Revenue, Net

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



	April 3,		January 2,
	2015		2015
Accounts receivable	$	29,553	$	28,154
Unbilled revenue		13,934		10,597
Allowance for doubtful accounts		(1,251)		(1,330)
Accounts receivable and unbilled revenue, net	$	42,236	$	37,421

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.

The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

4. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consisted of the following (in thousands):


		April 3,		January 2
		2015		2015
Accrued compensation and benefits	$	6,617	$	3,266
Accrued bonuses		2,234		7,682
Accrued restructuring related expenses		156		270
Deferred revenue		11,813		8,896
Accrued sales, use, franchise and VAT tax		1,949		1,977
Acquisition-related contingent consideration		3,440		3,440
Other accrued expenses		5,122		5,370
Total accrued expenses and other liabilities	$	31,331	$	30,901

5. Restructuring Costs

The Company recorded restructuring costs of $3.6 million during the quarter ended March 28, 2014, primarily for reductions in consultants and functional support personnel in Europe. These actions were taken as a result of the continued decline in demand in its European markets. The Company took steps to reduce its costs to better align its overall cost structure and organization with anticipated demand for its services. As of April 3, 2015, the Company had $0.2 million remaining in commitments primarily related to employee severance costs in Europe.

The following table sets forth the activity in the restructuring expense accruals (in thousands):



		Severance and Other
		Employee Costs

Accrual balance at January 2, 2015	$	270
Accrual		-
Expenditures		(114)
Accrual balance at April 3, 2015	$	156

6. Credit Facility

On February 21, 2012, the Company entered into a credit agreement with Bank of America, N.A. ("Bank of America"), pursuant to which Bank of America 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 five-year term loan (the “Term Loan”), which was used to finance the Company's $55.0 million tender offer for its shares in March 2012.

On August 27, 2013, the Company amended and restated the credit agreement (the "Credit Agreement") with Bank of America to finance a tender offer for shares of its common stock completed in October 2013. The Credit Agreement was amended and restated to:

To provide for up to an additional $17.0 million of borrowing under the Term Loan (the "Amended Term Loan" and together with the Revolver, the "Credit Facility"). As of April 3, 2015, the Company had $18.3 million principal amount outstanding on the Amended Term loan and a zero balance outstanding on the Revolver.

To extend the maturity date on the Revolver and the Amended Term Loan to August 27, 2018, five years from the date of the amendment and restatement of the Credit Agreement.

The Amended Term Loan was used to finance the Company’s $6.9 million tender offer for its shares in October 2013.

The obligations of the Company under the Credit Facility are guaranteed by the 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 Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

6. Credit Facility (continued)

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, as defined in the Credit Agreement. As of April 3, 2015, the applicable margin percentage was 1.50% per annum based on the consolidated leverage ratio, in the case of LIBOR rate advances, and 0.75% per annum, in the case of base rate advances.

The Term Loan requires the amortization of principal payments in equal quarterly installments beginning December 31, 2013 through August 27, 2018, unless payments are made in advance. The Company is subject to certain covenants, including total consolidated leverage, fixed cost coverage and liquidity requirements, each as set forth in the Credit Agreement, subject to certain exceptions.

7. Acquisition

During the quarter ended March 28, 2014, the Company acquired the U.S., Canada and Uruguay operations of Technolab International Corporation ("Technolab").

Management's purchase consideration was $3.0 million in cash upon closing. In addition, at closing, the sellers were granted $1.0 million in shares which is being recorded as non-cash compensation over the service vesting period. The sellers also had the ability to earn an additional $8.0 million in contingent consideration in cash and stock subject to an earn-out based on actual results achieved. The cash was not subject to vesting, however the stock was subject to service vesting. The entire cash portion of the earn-out was recorded as compensation expense in 2014 of which $0.9 million was recorded in the first quarter of 2014. The stock portion of the earn-out is being recorded as compensation expense over the service vesting period.

The purchase accounting resulted in a bargain purchase gain of $3.0 million on the acquisition and intangible assets with definite lives of $7.7 million which will be amortized over periods ranging from 2 years to 5 years.

8. Stock Based Compensation

During the quarter ended April 3, 2015, the Company issued 619,584 restricted stock units at a weighted average grant-date fair value of $7.93 per share. As of April 3, 2015, the Company had 2,144,774 restricted stock units outstanding at a weighted average grant-date fair value of $6.46 per share. As of April 3, 2015, $10.6 million of total restricted stock unit compensation expense related to unvested awards had not been recognized and is expected to be recognized over a weighted average period of approximately 2.4 years.

During the quarter ended April 3, 2015, there were no shares of common stock subject to vesting requirements granted. As of April 3, 2015, the Company had 264,474 shares of common stock subject to vesting requirements outstanding at a weighted average grant-date fair value of $7.54 per share. As of April 3, 2015, $1.8 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 approximately 2.8 years.

On February 8, 2012, the Compensation Committee approved the fiscal year 2012 through 2015 equity compensation target for the Company’s Chief Executive Officer and Chief Operating Officer. Under this target, a single performance-based option grant was made to the Company’s Chief Executive Officer and the Chief Operating Officer of 1,912,500 options and 1,004,063 options, respectively, totaling 2,916,563 options, each with an exercise price of $4.00 and a fair value of $1.31. One-half of the options vest upon the achievement of at least 50% growth of pro forma earnings per share and the remaining half vest upon the achievement of at least 50% pro forma EBITDA growth. Each metric could be achieved at any time during the six-year term of the award based on a trailing twelve month period measured quarterly. The grants will expire if neither target is achieved during the six-year term. The base year for the performance calculation is fiscal 2011 for both pro forma earnings per share and pro forma EBITDA performance targets.

In March of 2013, these performance-based stock option grants were surrendered by the Company’s Chief Executive Officer and Chief Operating Officer and replaced with performance-based SARs, equal to the number of options. The terms and conditions and the specific performance targets applicable to the SARs are the same as those applicable to the replaced options, with the exception that the SARs will be settled in cash, stock or any combination thereof, at the Company’s discretion.

Subsequent to year end 2014, in connection with the Company’s achievement of over 50% growth of pro-forma net earnings per share since fiscal 2011 base year and upon the approval of the Audit Committee’s review of the Company’s 2014 financial statements and Annual Report on Form 10-K, 50% of the outstanding SARs awards granted to the CEO and COO became vested.

The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. Shareholders’ Equity

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 ended April 3, 2015, the Company repurchased approximately 75 thousand shares of its common stock at an average price of $8.70 per share for a total cost of approximately $0.7 million. As of April 3, 2015, the Company had approximately $3.0 million available under its share repurchase plan authorization. During the quarter ended March 28, 2014, the Company repurchased approximately 716 thousand shares of its common stock at an average price of $6.06 per share for a total cost of approximately $4.3 million.

10. 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.

11. Geographic and Group Information

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



	Quarter Ended
	April 3,		March 28,
	2015		2014
Revenue:
North America	$	48,710	$	45,488
International (primarily European countries)		12,264		9,417
Total revenue	$	60,974	$	54,905

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



	April 3,		January 2,
	2015		2015
Long-lived assets:
North America	$	79,662	$	80,152
International (primarily European countries)		14,766		15,578
Total long-lived assets	$	94,428	$	95,730

As of April 3, 2015 and January 2, 2015, foreign assets included $14.2 million and $15.0 million, respectively, of goodwill related to the REL and Archstone acquisitions.

In the following table, the Hackett Group service group encompasses Benchmarking, Business Transformation, Executive Advisory and EPM and EPM Application Maintenance and Support. The ERP Solutions service group encompasses SAP ERP Technology and SAP Maintenance (in thousands):



	Quarter Ended
	April 3,		March 28,
	2015		2014

The Hackett Group	$	51,592	$	46,133
ERP Solutions		9,382		8,772
Total revenue	$	60,974	$	54,905

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 January 2, 2015. 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 11,000 benchmark studies over 21 years at over 3,500 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 Technology and SAP Maintenance groups.

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
	April 3,			March 28,
	2015			2014
Revenue:
Revenue before reimbursements	$	54,905	100.0%	$	49,418	100.0%
Reimbursements		6,069			5,487
Total revenue		60,974			54,905

Costs and expenses:
Cost of service:
Personnel costs before reimbursable
expenses		33,637	61.3%		32,638	66.0%
Non-cash stock compensation expense		1,035			615
Acquisition-related stock compensation expense		274			71
Acquisition consideration reflected
as compensation expense		—			860
Reimbursable expenses		6,069			5,487
Total cost of service		41,015			39,671

Selling, general and administrative costs		14,262	26.0%		12,911	26.1%
Non-cash stock compensation expense		515			653
Acquisition-related costs		—			120
Amortization of intangible assets		547			551
Total selling, general, and administrative expenses		15,324			14,235

Bargain purchase gain from acquisition		—			(3,015)
Restructuring expense		—			3,604
Total costs and operating expenses		56,339			54,495

Income from operations		4,635	8.4%		410	0.8%

Other expense:
Interest income		2			1
Interest expense		(140)	-0.3%		(124)	-0.3%

Income from operations before income taxes		4,497	8.2%		287	0.6%
Income tax expense (benefit)		1,492	2.7%		(118)	-0.2%
Net income	$	3,005	5.5%	$	405	0.8%

Diluted net income per common share	$	0.10		$	0.01

Adjusted non-GAAP data (unaudited):
Income from operations before income taxes	$	4,497		$	287
Bargain purchase gain from acquisition		—			(3,015)
Non-cash stock compensation expense		1,550			1,268
Acquisition-related stock compensation expense		274			71
Acquisition-related compensation expense		—			860
Acquisition-related costs		—			120
Restructuring costs		—			3,604
Amortization of intangible assets		547			551
Adjusted non-GAAP income before income taxes		6,868			3,746
Adjusted non-GAAP income tax expense		2,060	30.0%		1,423	38.0%
Adjusted non-GAAP net income	$	4,808		$	2,323

Adjusted non-GAAP diluted net income per share	$	0.16		$	0.08

Adjusted non-GAAP gross margin (1)		21,268	38.7%		16,780	34.0%

(1) Adjusted non-GAAP gross margin is revenue before reimbursable expenses less personnel costs before reimbursable expenses.

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. Variances excluding the impact of currency fluctuations are reflected as constant currency. ERP Solutions was not impacted by foreign currency rate fluctuations. In addition, revenue is analyzed based on geographical location of engagement team personnel.

Total Company revenue increased 11%, or 14% when adjusting for constant currency, to $61.0 million during the quarter ended April 3, 2015, as compared to $54.9 million during the quarter ended March 28, 2014.

The Hackett Group U.S. revenue increased 12% during the quarter ended April 3, 2015, as compared to the quarter ended March 28, 2014. The Hackett Group’s International revenue increased 10% during the quarter ended April 3, 2015, as compared to the quarter ended March 28, 2014. The Hackett Group’s international revenue accounted for 18%, or 20% in constant currency, of total Company revenue for both of the quarters ended April 3, 2015 and March 28, 2014.

ERP Solutions revenue increased 7% for the quarter ended April 3, 2015, as compared to the quarter ended March 28, 2014.

During the quarters ended April 3, 2015 and March 28, 2014, no customer accounted for more than 5% of total Company revenue.

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 before reimbursable expenses increased 3%, or $1.0 million, for the quarter ended April 3, 2015, as compared to the quarter ended March 28, 2014. This increase primarily reflects higher incentive compensation commensurate with Company performance. Total personnel costs before reimbursable expenses, as a percentage of revenue before reimbursements, were 61% for the quarter ended April 3, 2015, as compared to 66% for the quarter ended March 28, 2014. The decrease during the quarter ended April 3, 2015, as compared to March 28, 2014, was primarily due to the leverage from increased revenue and higher margins from our AMS services.

As a result, total Company adjusted non-GAAP gross margin in the first quarter 2015 was 39% of net revenues, as compared to 34% in the first quarter 2014.

Selling, General and Administrative. Selling, general and administrative costs were $14.3 million for the quarter ended April 3, 2015, as compared to $12.9 million for the quarter ended March 28, 2014. This increase is primarily due to higher selling-related expenses and incentive compensation accruals commensurate with Company performance. Selling, general and administrative costs as a percentage of revenue before reimbursements were 26% for both of the quarters ended April 3, 2015 and March 28, 2014.

Bargain Purchase Gain from Acquisition. During the first quarter of 2014, we acquired and accounted for certain assets and liabilities of Technolab International Corporation (“Technolab”). At closing, the Seller received $3.0 million in cash, not subject to vesting, and $1.0 million in stock, subject to service vesting. Additionally, the seller had the ability to earn up to $8.0 million in a combination of cash, not subject to service vesting, and stock, subject to service vesting, based on a one year profitability based earn-out. The amounts paid to the Seller at closing in stock, as well as the amounts earned as part of the earn-out due to the Seller in cash, not subject to service vesting, and stock, subject to service vesting, were accounted for as compensation expense.

Restructuring Costs. During the quarter ended March 28, 2014, we recorded restructuring costs of $3.6 million, primarily for reductions of consultants and office leases in Europe. These actions were taken as a result of our continued volatility in demand in our European markets. As of April 3, 2015, the Company had $0.2 million remaining in commitments relating to employee severance costs in Europe.

Income Taxes. In the quarter ended April 3, 2015, we recorded income tax expense of $1.5 million which reflected a tax rate of 33.0% for certain federal, foreign and state taxes. In the quarter ended March 28, 2014, we recorded income tax benefit of $0.1 million. The increase in tax for the quarter ended April 3, 2015, as compared to the quarter ended March 28, 2014, was primarily due to lower taxable income in the first quarter of 2014 as a result of the restructuring costs recorded, as discussed above.

Liquidity and Capital Resources

As of April 3, 2015 and January 2, 2015, we had $10.8 million and $14.6 million, respectively, classified in cash and cash equivalents on the consolidated balance sheets.

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



	Quarter Ended
	April 3,		March 28,
	2015			2014
Cash flows used in operating activities	$	(2,405)	$	(7,987)
Cash flows used in investing activities	$	(725)	$	(2,921)
Cash flows (used) provided by financing activities	$	(653)	$	5,391

Cash Flows from Operating Activities

Net cash used in operating activities was $2.4 million during the quarter ended April 3, 2015, as compared to net cash used by operating activities of $8.0 million during the quarter ended March 28, 2014. In 2015, the net cash utilized was primarily due to a decrease in accrued liabilities and accounts payable as a result of the payout of incentive compensation, the timing of maintenance payments related to our AMS business, and an increase in accounts receivable and unbilled balances primarily due to an increase in revenue and in days of sales outstanding; partially offset by net income adjusted for non-cash items. In 2014, the utilization of cash was primarily due to decreased accrued liabilities and accounts payable as a result of the timing of maintenance payments related to our AMS business, incentive compensation payout and an increase in accounts receivable and unbilled balances.

Cash Flows from Investing Activities

Net cash used in investing activities was $0.7 million and $2.9 million during the quarter ended April 3, 2015 and March 28, 2014, respectively. Net cash used in investing activities during the first quarter ended April 3, 2015 was due to capital expenditures primarily for the continued development of benchmark technology. Net cash used in investing activities during the quarter ended March 28, 2014, was primarily related to net cash consideration paid for the EPM AMS acquisition and capital expenditures for the development of the Hackett Performance Exchange.

Cash Flows from Financing Activities

Net cash used from financing activities was $0.7 million during the quarter ended April 3, 2015. The net cash used from financing activities during the quarter ended April 3, 2015 was due to the repurchase of $0.7 million of Company stock. Net cash provided from financing activities was $5.4 million during the quarter ended March 28, 2014, which was primarily due to $9.5 million of borrowings under our Credit Facility and proceeds from the sale of the Company common stock. This increase in cash was offset by the repurchase of $4.3 million of Company stock.

We believe that available funds (including the cash on hand and $20.0 million in 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.

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 January 2, 2015.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

As of April 3, 2015, 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 nine-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 results of operations for the quarter ended April 3, 2015.

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 Control Over Financial Markets

There were no changes in our internal control 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 control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

Item 1A. Risk Factors.

There have been no material changes to any of the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended January 2, 2015.

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

Issuer Purchases of Equity Securities

During the quarter ended April 3, 2015, the Company repurchased approximately 75 thousand shares of its common stock at an average price of $8.70 per share, for a total cost of approximately $0.7 million, under the repurchase plan approved by the Company's Board of Directors. As of April 3, 2015, the Company had approximately $3.0 million of authorization under the plan.



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

Balance as of January 2, 2015	-	$	-	-	$	3,665,104
January 3, 2015 to January 30, 2015	-	$	-	-	$	3,665,104
January 31, 2015 to February 27, 2015	-	$	-	-	$	3,665,104
February 28, 2015 to April 3, 2015	75,059	$	8.70	75,059	$	3,011,796
	75,059	$	8.70	75,059

Item 6.Exhibits.

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

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: May 13, 2015	/s/ Robert A. Ramirez
	Robert A. Ramirez
	Executive Vice President, Finance and Chief Financial Officer

INDEX TO EXHIBITS



Exhibit No.	Exhibit Description

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

Exhibit 31.1

CERTIFICATION

I, Ted A. Fernandez, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of The Hackett Group, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: May 13, 2015								/s/ Ted A. Fernandez
								Ted A. Fernandez
								Chairman of the Board and Chief Executive Officer
								The Hackett Group, Inc.

Exhibit 31.2

CERTIFICATION

I, Robert A. Ramirez, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of The Hackett Group, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: May 13, 2015								/s/ Robert A. Ramirez
								Robert A. Ramirez
								Executive Vice President, Finance and Chief Financial Officer
								The Hackett Group, Inc.

Exhibit 32

THE HACKETT GROUP, INC

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of The Hackett Group, Inc. (the “Company”) on Form 10-Q for the period ended April 3, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Ted A. Fernandez, Chairman of the Board and Chief Executive Officer, and Robert A. Ramirez, Executive Vice President, Finance and Chief Financial Officer, of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:

(1)

The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Ted A. Fernandez

Ted A. Fernandez

Chairman of the Board and Chief Executive Officer

May 13, 2015

/s/ Robert A. Ramirez

Robert A. Ramirez

Executive Vice President, Finance and Chief Financial Officer

May 13, 2015

A signed original of this statement required by Section 906 has been provided to The Hackett Group, Inc. and will be retained by The Hackett Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

Hackett (NASDAQ:HCKT)
Historical Stock Chart
From Oct 2024 to Nov 2024