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Table of Contents

 

 

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 April 2, 2010

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 333-48123

 

 

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 Number)

 

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  ¨    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. (Check one):

 

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 May 5, 2010, there were 41,161,532 shares of common stock outstanding.

 

 

 


Table of Contents

The Hackett Group, Inc.

TABLE OF CONTENTS

 

         Page

PART I - FINANCIAL INFORMATION

Item 1.   Financial Statements   
  Consolidated Balance Sheets as of April 2, 2010 and January 1, 2010 (unaudited)    3
  Consolidated Statements of Operations for the Quarters Ended April 2, 2010 and April 3, 2009 (unaudited)    4
  Consolidated Statements of Cash Flows for the Quarters Ended April 2, 2010 and April 3, 2009 (unaudited)    5
  Notes to Consolidated Financial Statements (unaudited)    6
Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations    12
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 4.   Removed and Reserved    17
Item 6.   Exhibits    17
SIGNATURES    18
INDEX TO EXHIBITS    19

 

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Table of Contents

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

The Hackett Group, Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

 

      April 2,
2010
    January 1,
2010
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 15,133      $ 15,004   

Accounts receivable and unbilled revenue, net of allowance of $1,344 and $1,354 at April 2, 2010 and January 1, 2010, respectively

     32,253        28,653   

Prepaid expenses and other current assets

     2,207        2,683   
                

Total current assets

     49,593        46,340   

Restricted cash

     1,475        1,475   

Property and equipment, net

     7,297        7,137   

Other assets

     4,334        4,871   

Goodwill, net

     75,949        76,712   
                

Total assets

   $ 138,648      $ 136,535   
                

LIABILITIES AND SHAREHOLDERS' EQUITY

    

Current liabilities:

    

Accounts payable

   $ 6,743      $ 3,674   

Accrued expenses and other liabilities

     28,945        31,231   
                

Total current liabilities

     35,688        34,905   

Accrued expenses and other liabilities, non-current

     2,482        3,378   
                

Total liabilities

     38,170        38,283   
                

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; 58,408,042 and 57,652,536 shares issued at April 2, 2010 and January 1, 2010, respectively

     58        57   

Additional paid-in capital

     301,844        301,366   

Treasury stock, at cost, 17,009,712 and 16,976,832 shares at April 2, 2010 and January 1, 2010, respectively

     (59,506     (59,423

Accumulated deficit

     (136,407     (139,125

Accumulated other comprehensive loss

     (5,511     (4,623
                

Total shareholders’ equity

     100,478        98,252   
                

Total liabilities and shareholders’ equity

   $ 138,648      $ 136,535   
                

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

 

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The Hackett Group, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

     Quarter Ended
     April 2,
2010
   April 3,
2009

Revenue:

     

Revenue before reimbursements

   $ 41,850    $ 35,990

Reimbursements

     4,878      3,526
             

Total revenue

     46,728      39,516

Costs and expenses:

     

Cost of service:

     

Personnel costs before reimbursable expenses (includes $615 and $560 of stock compensation expense in the quarters ended April 2, 2010 and April 3, 2009, repectively)

     26,749      22,274

Reimbursable expenses

     4,878      3,526
             

Total cost of service

     31,627      25,800

Selling, general and administrative costs (includes $262 and $106 of stock compensation expense in the quarters ended April 2, 2010 and April 3, 2009, repectively)

     13,242      12,839
             

Total costs and operating expenses

     44,869      38,639
             

Income from operations

     1,859      877

Other income:

     

Non-cash acquisition earn-out shares re-measurement gain

     943      —  

Interest income

     6      25
             

Income before income taxes

     2,808      902

Income taxes

     110      63
             

Net income

   $ 2,698    $ 839
             

Basic net income per common share:

     

Net income per common share

   $ 0.07    $ 0.02

Weighted average common shares outstanding

     39,636      38,443

Diluted net income per common share:

     

Net income per common share

   $ 0.07    $ 0.02

Weighted average common and common equivalent shares outstanding

     41,289      38,703

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

 

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The Hackett Group, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Quarter Ended  
     April 2,
2010
    April 3,
2009
 

Cash flows from operating activities:

    

Net income

   $ 2,698      $ 839   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Depreciation expense

     454        536   

Amortization expense

     460        160   

Provision for doubtful accounts

     74        218   

(Gain) loss on foreign currency translation

     (24     414   

Non-cash acquisition earn-out shares re-measurement gain

     (943     —     

Non-cash stock compensation expense

     877        666   

Changes in assets and liabilities:

    

(Increase) decrease in accounts receivable and unbilled revenue

     (3,658     3,900   

Decrease (increase) in prepaid expenses and other assets

     475        (510

Increase (decrease) in accounts payable

     3,069        (469

Decrease in accrued expenses and other liabilities

     (2,694     (10,988
                

Net cash provided by (used in) operating activities

     788        (5,234

Cash flows from investing activities:

    

Purchases of property and equipment

     (580     (944

Proceeds from redemptions of marketable securities

     —          466   
                

Net cash used in investing activities

     (580     (478

Cash flows from financing activities:

    

Repurchases of common stock

     (83     (2,117
                

Net cash used in financing activities

     (83     (2,117

Effect of exchange rate on cash

     4        174   

Net increase (decrease) in cash and cash equivalents

     129        (7,655

Cash and cash equivalents at beginning of year

     15,004        32,060   
                

Cash and cash equivalents at end of year

   $ 15,133      $ 24,405   
                

Supplemental disclosure of cash flow information:

    

Cash paid for income taxes

   $ 51      $ 148   

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

 

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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 (“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 accounting principles generally accepted in the United States of America for annual financial statements and should be read in conjunction with the consolidated financial statements and notes thereto for the year ended January 1, 2010 included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission. The consolidated results of operations for the quarter ended April 2, 2010 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 accounting principles generally accepted in the United States of America 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 and accrued expenses and other liabilities, including the liability for the earn-out shares.

As of April 2, 2010 and January 1, 2010, the fair value of all financial instruments approximated the respective fair value due to the short-term nature and maturity of these instruments.

In 2009, the Company had an investment in Bank of America’s Strategic Cash Portfolio (“Portfolio”) which was fully redeemed during the year. During the quarter ended April 3, 2009, the Company received redemptions from the Portfolio of $466 thousand.

Recently Issued Accounting Standards

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU)” No. 2009-13, Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force (“ASU 2009-13”), which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or serviceso (deliverables) separately rather than as a combined unit. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified beginning in fiscal years on or after June 15, 2010, however, early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2009-13 will have on its consolidated financial statements.

In February 2010, the FASB issued ASU 2010-09, Amendments to Certain Recognition and Disclosure Requirements, (“ASU 2010-09”) which amends ASC 855, Subsequent Events, to address certain implementation issues related to an entity’s requirement to perform and disclose subsequent-events procedures. ASU 2010-09 requires SEC filers to evaluate subsequent events through the date the financial statements are issued and exempts SEC filers from disclosing the date through which subsequent events have been evaluated. ASU 2010-09 was effective immediately upon issuance. The adoption of ASU 2010-09 did not have a material impact on the Company’s consolidated financial statements.

Reclassifications

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

 

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The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

2. Acquisitions and Investing Activities

Effective November 9, 2009, the Company acquired Archstone Consulting, LLC (“Archstone”) pursuant to an Asset Purchase Agreement (the “Asset Purchase Agreement”) under which the Company purchased from Archstone, Archstone Consulting UK Limited and Archstone Consulting BV the assets used in connection with Archstone’s consulting business. The results of Archstone’s operations have been included in the Company’s consolidated financial statements since November 10, 2009.

The acquisition and resulting purchase price of Archstone was accounted for in accordance with Accounting Standards Codification (“ASC”) 805. The purchase price for the assets acquired and liabilities assumed was 5.2 million unregistered shares of the Company’s common stock, of which 1.7 million unregistered shares are subject to an earn-out based on revenue achieved in 2010.

Pursuant to the Asset Purchase Agreement, the earn-out unregistered shares are based on Archstone’s net revenue achievement in 2010 as follows: (i) if average net service revenue is less than or equal to $30.0 million, then all of the earn-out shares shall be forfeited (ii) if average net service revenue is greater than or equal to $45.0 million, then none of the earn-out shares shall be forfeited, and (iii) if average net service revenue is greater than $30.0 million but less than $45.0 million, then the number of earn-out shares that shall be forfeited on a pro-rata basis.

Based on actual net revenue achievements in 2009 and 2010, and the 2010 annual planning process presented to the Board of Directors which is also the basis for performance compensation, the Company’s estimate is that the $45.0 million revenue target will be met by Archstone. On the acquisition date, the Company recorded a liability for the 1.7 million earn-out unregistered shares based on the closing value of the Company’s common stock on the effective date of acquisition of $3.48.

As a result of the fluctuation in the Company’s share price, the Company recorded a non-cash re-measurement gain of $943 thousand in accordance with ASC 805 in the consolidated statement of operations for the quarter ended April 2, 2010. Fluctuations in the Company’s share price will result in non-cash gains or losses in the interim reporting periods until final determination is made.

On May 11, 2010, the Company and the Sellers agreed to the final earn-out determination of 1,435,000 shares of the total 1,655,000 shares of common stock to be deemed earned, and therefore, 220,000 shares were forfeited by Sellers. There shall be no further opportunity for the Sellers to earn the 220,000 forfeited shares.

The purchase price allocation resulted in $11.9 million which exceeded the estimated fair value of tangible and intangible assets and liabilities, and which was allocated to goodwill. The goodwill was included in The Hackett Group reporting unit. The Company believes the goodwill primarily represents the fair value of the assembled workforce acquired. The goodwill amortization is deductible for tax purposes.

 

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The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

3. 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 or restricted stock units issued to employees, the calculation includes only the vested portion of such stock.

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 shares:

 

     Quarter Ended
     April 2,
2010
   April 3,
2009

Basic weighted average common shares outstanding

   39,635,661    38,442,713

Effect of dilutive securities:

     

Unvested restricted stock units issued to employees

   1,030,802    240,946

Common stock issuable upon the exercise of stock options

   21,944    19,256

Acquisition-related unregistered shares held in escrow

   600,400    —  
         

Dilutive weighted average common shares outstanding

   41,288,807    38,702,915
         

Approximately 31 thousand and 227 thousand shares of common stock were excluded from the computations of diluted net income per common share for the quarters ended April 2, 2010 and April 3, 2009, respectively, as their inclusion would have had an anti-dilutive effect on diluted net income per share.

4. Comprehensive Income

The Company accounts for comprehensive income under FASB ASC 220, Comprehensive Income. Comprehensive income is summarized below (in thousands):

 

     Quarter Ended  
     April 2,
2010
    April 3,
2009
 

Net income

   $ 2,698      $ 839   

Change in cumulative foreign currency on translation adjustment

     (890     (124
                

Comprehensive income

   $ 1,808      $ 715   
                

5. Restructuring

As of April 2, 2010 and January 1, 2010, the Company had restructuring expense accruals related to the closure and consolidation of facilities and related exit costs recorded in fiscal years 2001, 2002, 2005 and 2009. The following table sets forth the activity in the restructuring expense accruals (in thousands):

 

     Accrual Balance at
January 1, 2010
   Expenditures     Accrual Balance at
April 2, 2010

2001 Restructuring Accrual

   $ 829    $ (117   $ 712

2002 Restructuring Accrual

   $ 1,158    $ (162   $ 996

2005 Restructuring Accrual

   $ 431    $ (64   $ 367

2009 Restructuring Accrual

   $ 4,714    $ (2,906   $ 1,808

 

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Table of Contents

The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

6. Accounts Receivable and Unbilled Revenue, Net

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

 

     April 2,
2010
    January 1,
2010
 

Accounts receivable

   $ 22,533      $ 22,340   

Unbilled revenue

     11,064        7,667   

Allowance for doubtful accounts

     (1,344     (1,354
                

Accounts receivable and unbilled revenue, net

   $ 32,253      $ 28,653   
                

Accounts receivable for the periods ending April 2, 2010 and January 1, 2010, is net of uncollected advanced billings. Unbilled revenue as of April 2, 2010 and January 1, 2010 includes recognized recoverable costs and accrued profits on contracts for which billings had not been presented to clients.

7. Stock Based Compensation

During the quarter ended April 2, 2010, the Company issued 692,518 restricted stock units at a weighted average grant-date fair value of $2.98. As of April 2, 2010, the Company had 2,379,197 restricted stock units outstanding at a weighted average grant-date fair value of $3.04. As of April 2, 2010, there was $4.5 million of total restricted stock unit compensation expense related to nonvested awards not yet recognized, which is expected to be recognized over a weighted average period of 2.32 years.

As of April 2, 2010, the Company had 975,714 shares of common stock subject to vesting requirements outstanding at a weighted average grant-date fair value of $3.78. As of April 2, 2010, there was $1.3 million of total restricted stock unit compensation expense related to nonvested awards not yet recognized, which is expected to be recognized over a weighted average period of 2.47 years.

8. Shareholders’ Equity

Treasury Stock

Under the repurchase plan, the Company may buy back shares of its outstanding stock from time to time either on the open market or through privately negotiated transactions subject to market conditions and trading restrictions. During the quarter ended April 2, 2010, the Company repurchased approximately 33 thousand shares of its common stock at an average price of $2.51, for a total cost of approximately $83 thousand. As of April 2, 2010, the Company had $5.5 million available under its buyback program.

 

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The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

9. 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.

10. 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
     April 2,
2010
   April 3,
2009

Revenue:

     

North America

   $ 38,083    $ 30,771

International (primarily European countries)

     8,645      8,745
             

Total Revenue

   $ 46,728    $ 39,516
             

Long-lived assets are attributed to the following geographical areas (in thousands):

 

     April 2,
2010
   January 1,
2010

Long-Lived Assets:

     

North America

   $ 72,130    $ 73,742

International (primarily European countries)

     15,450      14,978
             

Total Long-Lived Assets

   $ 87,580    $ 88,720
             

As of April 2, 2010, foreign assets included $15.2 million of goodwill and intangible assets, related to the REL and Archstone acquisitions. As of January 1, 2010, foreign assets included $14.4 million of goodwill and intangible assets related to the REL acquisition. As of January 1, 2010 domestic assets included $15.9 million of goodwill and intangible assets related to the Archstone acquisition which were provisionally allocated to domestic assets.

 

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The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

10. Geographic and Group Information (continued)

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

 

     Quarter Ended
     April 2,
2010
   April 3,
2009

The Hackett Group

   $ 36,582    $ 27,333

Hackett Technology Solutions

     10,146      12,183
             

Total Revenue

   $ 46,728    $ 39,516
             

 

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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 in these sections. 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 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 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 January 1, 2010. 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”) 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.

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 5,000 benchmark studies over 18 years at 2,700 of the world’s leading companies.

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

In the following discussion, “Hackett” represents our total company, “The Hackett Group” encompasses our Benchmarking, Business Transformation and Executive Advisory groups, and “Hackett Technology Solutions” encompasses our technology groups, including SAP, Oracle and EPM Oracle.

 

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Results of Operations

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

 

     Quarter Ended  
     April 2,
2010
    April 3,
2009
 

Revenue:

          

Revenue before reimbursements

   $ 41,850    89.6   $ 35,990    91.1

Reimbursements

     4,878    10.4     3,526    8.9
                          

Total revenue

     46,728    100.0     39,516    100.0

Costs and expenses:

          

Cost of service:

          

Personnel costs before reimbursable expenses

     26,749    57.2     22,274    56.4

Reimbursable expenses

     4,878    10.4     3,526    8.9
                          

Total cost of service

     31,627    67.6     25,800    65.3

Selling, general and administrative costs

     13,242    28.3     12,839    32.5
                          

Total costs and operating expenses

     44,869    95.9     38,639    97.8
                          

Income from operations

     1,859    4.1     877    2.2

Other income:

          

Non-cash acquisition earn-out shares re-measurement gain

     943    2.0     —      0.0

Interest income

     6    0.0     25    0.0
                          

Income before income taxes

     2,808    6.1     902    2.2

Income tax expense

     110    0.2     63    0.1
                          

Net income

   $ 2,698    5.9   $ 839    2.1
                          

 

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Quarter Ended April 2, 2010 versus Quarter Ended April 3, 2009

Revenue. We are a global company with operations primarily in the United States and Western Europe. Our revenue is denominated in multiple currencies, mostly the U.S. Dollar, British Pound and Euro, and as a result is affected by currency exchange rate fluctuations. Exchange rate fluctuations had an impact on our revenue comparisons between the quarters ended April 2, 2010 and April 3, 2009. Hackett Technology Solutions was not materially impacted by foreign currency rate fluctuations.

The following table summarizes revenue (in thousands):

 

     Quarter Ended
     April 2,
2010
   April 3,
2009

The Hackett Group

   $ 36,582    $ 27,333

Hackett Technology Solutions

     10,146      12,183
             

Total Revenue

   $ 46,728    $ 39,516
             

Total Hackett revenue increased 18% for the quarter ended April 2, 2010, as compared to the quarter ended April 3, 2009.

The Hackett Group revenue increased 34% for the quarter ended April 2, 2010, as compared to the quarter ended April 3, 2009. The increase in The Hackett Group revenue was primarily as a result of the acquisition of Archstone Consulting which closed in November 2009.

The Hackett Group’s international revenue, which is primarily based on the country of the contracting entity, accounted for 24% of The Hackett Group’s total revenue in the first quarter of 2010, as compared to 32% in the first quarter of 2009. This decrease was a result of the addition of Archstone revenue, which is primarily a US-based business, as well as from continuing weakness in the European economy.

Hackett Technology Solutions revenue decreased 17% for the quarter ended April 2, 2010, as compared to the quarter ended April 3, 2009, primarily due to lower Oracle-related revenue.

During the quarter ended April 2, 2010, two customers accounted for between 5% and 6% of our total revenue, and during the quarter ended April 3, 2009, one customer accounted for 8% of our total revenue.

Cost of Service. Cost of service primarily consists of salaries, benefits and incentive compensation for consultants and reimbursable expenses associated with projects. Cost of service before reimbursable expenses increased 20%, or $4.5 million, for the quarter ended April 2, 2010, as compared to the quarter ended April 3, 2009, primarily due to the increased headcount from the Archstone acquisition.

Total cost of service as a percentage of revenue before reimbursable expenses was 57% for the quarter ended April 2, 2010, compared to 56% for the quarter ended April 3, 2009.

The Hackett Group total revenue generated gross margin of 38% for the quarter ended April 2, 2010, as compared to Hackett Technology Solutions which generated gross margin of 19% for the same period. On a net revenue basis, total revenue excluding reimbursements, The Hackett Group generated gross margins as a percentage of revenue of 43%, as compared to Hackett Technology Solutions, which generated gross margin as a percentage of net revenue of 21%.

Selling, General and Administrative. Selling, general and administrative costs increased by 3%, or $0.4 million, for the quarter ended April 2, 2010, as compared to the quarter ended April 3, 2009. The increase was primarily related to higher amortization of intangible assets resulting from the Archstone acquisition. Selling, general and administrative costs as a percentage of revenue were 28% for the quarter ended April 2, 2010, as compared to 33% for the quarter ended April 3, 2009 due to selling, general and administrative leverage on increased revenue.

 

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Non-Cash Acquisition Earn-out Shares Re-measurement Gain. As a result of the fluctuation in the share price of our common stock, we recorded a non-cash re-measurement gain of $943 thousand in accordance with ASC 805 in the consolidated statement of operations. Fluctuations in the share price of our common stock will result in non-cash gains or losses in the interim reporting periods until final determination is made.

On May 11, 2010, the final earn-out determination was settled for 1,435,000 shares of the total 1,655,000 shares of common stock to be deemed earned, and therefore, 220,000 shares were forfeited. There shall be no further opportunity to earn the 220,000 forfeited shares.

Income Taxes. We recorded income tax expense of $110 thousand for the quarter ended April 2, 2010, which reflected an estimated annual tax rate of 0.4% for certain federal and state taxes. For the quarter ended April 3, 2009, we recorded income taxes of $63 thousand which reflected estimated annual tax rates of 7.0% for certain federal and state taxes.

Liquidity and Capital Resources

As of April 2, 2010 and January 1, 2010, we had $15.1 million and $15.0 million, respectively, classified in cash and cash equivalents in the accompanying consolidated balance sheets. During these same periods, we had $1.5 million on deposit with financial institutions that served as collateral for letters of credit for operating leases and 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):

 

     Quarter Ended  
     April 2,
2010
    April 3,
2009
 

Cash flows from operating activities

   $ 788      $ (5,234

Cash flows from investing activities

   $ (580   $ (478

Cash flows from financing activities

   $ (83   $ (2,117

Net cash provided by operating activities was $0.8 million for the quarter ended April 2, 2010, as compared to net cash used in operating activities of $5.2 million for the quarter ended April 3, 2009. During the quarter ended April 2, 2010, net cash provided by operating activities was primarily attributable to an increase in accounts payable due to the timing of vendor payments and earnings net of non-cash items, mostly offset by an increase in accounts receivable and unbilled revenue and accrued expenses and other liabilities. Although there was an increase in accounts receivable and unbilled revenue as a result of higher revenue and sales, the increase was partially offset by a reduction in days sales outstanding of five days. The decrease in accrued expenses and other liabilities was mostly due to the timing of the payroll cycle, usage of the restructuring reserves, and 2009 year end incentive compensation awards.

Net cash used in operating activities for the quarter ended April 3, 2009 was primarily attributable to the payout of 2008 incentive compensation awards and the timing of the payroll cycle, partially offset by higher accounts receivable collections in the quarter.

Net cash used in investing activities was $0.6 million for the quarter ended April 2, 2010, as compared to net cash used in investing activities of $0.5 million for the quarter ended April 3, 2009. Cash used in investing activities for the quarter ended April 2, 2010 was primarily attributable to capital expenditures.

Net cash used in investing activities in the quarter ended April 3, 2009 was primarily attributable to $0.9 million in capital expenditures, partially offset by $0.5 million of Bank of America’s Columbia Strategic Cash Portfolio redemptions.

Net cash used in financing activities was $83 thousand for the quarter ended April 2, 2010, as compared to $2.1 million for the quarter ended April 3, 2009. Cash used in financing activities for the quarter ended April 2, 2010 was attributable to the repurchase of 33 thousand shares of our common stock at an average price of $2.51 per share, for a total cost of $83 thousand. Net cash used in financing activities for the quarter ended April 3, 2009 was attributable to the repurchase of 1.0 million shares of our common stock at an average price of $2.08 per share, for a total cost of $2.1 million.

Under our repurchase plan, we may buy back shares from time to time either on the open market or through privately negotiated transactions subject to market conditions and trading restrictions. As of April 2, 2010, we had $5.5 million available under the buyback program.

 

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We currently believe that available funds 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 discussion of recently issued accounting standards, please see “Item 1, Financial Statements” in Part I of this document.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

At April 2, 2010, our exposure to market risk related primarily to changes in interest rates and foreign currency exchange rate risks.

Interest Rate Risk

We invest only with high credit quality issuers and we do not use derivative financial instruments in our investments.

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 and the Euro. These exposures may change over time as business practices evolve. Currently, we do not hold any derivative contracts that hedge our foreign currency risk, but we may adopt such strategies in the future.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls”) pursuant to Rule 13a-14(c) and Rule 15d-14(c) under the Securities Exchange Act of 1934. Based upon that evaluation, the CEO and CFO concluded that our disclosure controls are effective in timely alerting them to material information required to be included in our periodic SEC filings.

Limitations on the Effectiveness of Controls

Management, including our CEO and CFO, does not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

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.

 

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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

During the quarter ended April 2, 2010, the Company repurchased approximately 33 thousand shares of its common stock at a cost of approximately $83 thousand under the Company’s share repurchase program approved by the Board of Directors in 2002. All repurchases were made in the open market or through privately negotiated transactions, subject to market conditions and trading restrictions. There is no expiration date on the current authorization during the period covered by the table, nor was any determination made by the Company to suspend or cancel purchases under the 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 January 1, 2010

   —      $ —      —      $ 578,515

January 2, 2010 to January 29, 2010

   13,000    $ 2.55    13,000    $ 545,419

January 30, 2010 to February 26, 2010*

   19,880    $ 2.49    19,880    $ 5,495,917

February 27, 2010 to April 2, 2010

   —      $ —      —      $ 5,495,917
                   
   32,880    $ 2.51    32,880   
                   

 

* In February 2010, the Board of Directors approved an additional $5.0 million to the Company’s share repurchase program, thereby increasing the total authorization to $65.0 million.

 

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.

 

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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 12, 2010    

/s/ Robert A. Ramirez

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

 

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INDEX TO EXHIBITS

 

Exhibit

No.

 

Exhibit Description

  3.1   Second Amended and Restated Articles of Incorporation of the Registrant, as amended (incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 29, 2000).
  3.2   Amended and Restated Bylaws of the Registrant, as amended (incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 29, 2000).
  3.3   Articles of Amendment of the Third Amended and Restated Articles of Incorporation of the Registrant (incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 28, 2007).
  3.4   Amendment to Amended and Restated Bylaws of the Registrant (incorporated herein by reference to the Registrant’s Form 8-K filed on March 31, 2008).
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).

 

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