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HCKT > SEC Filings for HCKT > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for HACKETT GROUP, INC.

Form 10-Q for HACKETT GROUP, INC.


7-Nov-2012

Quarterly Report


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 and interest rates. An additional description of our risk factors is set forth in our Annual Report on Form 10-K for the year ended December 30, 2011. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

OVERVIEW

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

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

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

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


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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                                       Nine Months Ended
                                        September 28,             September 30,              September  28,             September  30,
                                            2012                       2011                       2012                       2011
Revenue:
Revenue before reimbursements       $ 52,299        100.0 %    $ 51,574       100.0 %    $ 158,131        100.0 %    $ 150,913       100.0 %
Reimbursements                         6,322                      6,361                     18,792                      18,693

Total revenue                         58,621                     57,935                    176,923                     169,606
Costs and expenses:
Cost of service:
Personnel costs before
reimbursable expenses                 33,414         63.9 %      32,739        63.5 %      101,192         64.0 %       95,814        63.5 %
Reimbursable expenses                  6,322                      6,361                     18,792                      18,693

Total cost of service                 39,736                     39,100                    119,984                     114,507
Selling, general and
administrative costs                  14,623         28.0 %      14,324        27.8 %       44,528         28.1 %       42,599        28.2 %
Restructuring benefit                   (319 )                       -                        (319 )                        -

Total costs and operating
expenses                              54,040                     53,424                    164,193                     157,106

Income from operations                 4,581          8.8 %       4,511         8.7 %       12,730          8.1 %       12,500         8.3 %
Other income (expense):
Interest, net                           (194 )       -0.4 %          11         0.0 %         (451 )       -0.3 %           24         0.0 %

Income before income taxes             4,387          8.4 %       4,522         8.8 %       12,279          7.8 %       12,524         8.3 %
Income taxes                           1,751          3.3 %         176         0.4 %        2,265          1.5 %          448         0.3 %

Net income                          $  2,636          5.1 %    $  4,346         8.4 %    $  10,014          6.3 %    $  12,076         8.0 %

Revenue. We are a global company with operations located primarily in the United States and Western Europe. Our revenue is denominated in multiple currencies, primarily the U.S. Dollar, British Pound, Euro and Australian Dollar, and as a result is affected by currency exchange rate fluctuations. The exchange rate fluctuations had an impact on our revenue comparisons between the quarters and nine months ended September 28, 2012 and September 30, 2011; therefore, in the following revenue discussion we will disclose The Hackett Group revenue variances based on the U.S. Dollar reporting currency, as well as variances excluding the impact of currency fluctuations, otherwise referred to below as constant currency. ERP Solutions was not materially impacted by foreign currency rate fluctuations.

Total Company revenue increased 1% (or 3% in constant currency) and 4% (or 6% in constant currency) for the quarter and nine months ended September 28, 2012, respectively, as compared to the quarter and nine months ended September 30, 2011. The following table summarizes revenue (in thousands):

                                              Quarter Ended                             Nine Months Ended
                                   September 28,         September 30,         September 28,         September 30,
                                       2012                  2011                  2012                  2011
The Hackett Group                 $        45,429       $        46,972       $       142,657       $       136,578
ERP Solutions                              13,192                10,963                34,266                33,028

Total revenue                     $        58,621       $        57,935       $       176,923       $       169,606

The Hackett Group revenue decreased by 3% (or 1% in constant currency) and increased by 5% (or 6% in constant currency) for the quarter and nine months ended September 28, 2012, respectively, as compared to the quarter and nine months ended September 30, 2011. The Hackett Group's international revenue, which is primarily based on the country of the contracting entity, accounted for 19% (or 21% in constant currency) and 20% (or 22% in constant currency) of total Company revenue for the quarter and nine months ended September 28, 2012, respectively, as compared to 24% and 22% for the quarter and nine months ended September 30, 2011, respectively.


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ERP Solutions revenue increased 20% and 4% for the quarter and nine months ended September 28, 2012, respectively, as compared to the quarter and nine months ended September 30, 2011, primarily due to higher market demand in the SAP group.

During the quarter and nine months ended September 28, 2012 and September 30, 2011, no customer accounted for more than 3% of total Company revenue.

Cost of Service. Cost of service primarily consists of salaries, benefits and incentive compensation for consultants, subcontractor fees and reimbursable expenses associated with projects. Cost of service before reimbursable expenses increased 2%, or $0.7 million, and 6%, or $5.4 million, for the quarter and nine months ended September 28, 2012, respectively, as compared to the quarter and nine months ended September 30, 2011. The increase was primarily due to the increased headcount to align resources with market demand.

Total cost of service before reimbursable expenses, as a percentage of revenue before reimbursements, remained constant at 64% for both the quarters and nine months ended September 28, 2012 and September 30, 2011. As a percentage of revenue before reimbursements, The Hackett Group generated gross margins of 35% and 37% for the quarter and nine months ended September 28, 2012, respectively, as compared to ERP Solutions, which generated gross margins of 43% and 36% for the same periods, respectively.

Selling, General and Administrative. Selling, general and administrative costs were $14.6 million and $44.5 million for the quarter and nine months ended September 28, 2012, respectively, as compared to $14.3 million and $42.6 million for the quarter and nine months ended September 30, 2011, respectively. Selling, general and administrative costs as a percentage of revenue before reimbursements remained constant at 28% for both the quarter and nine months ended September 28, 2012 and September 30, 2011, primarily due to selling, general and administrative leverage on increased revenue.

Restructuring Benefit. As of September 28, 2012, we no longer had any commitments relating to acquisition integration activities. During the quarter ended September 28, 2012, we reversed the existing accrued facilities restructuring liability of $0.3 million and recorded a corresponding facilities restructuring benefit on the Consolidated Statements of Operations.

Income Taxes. The liability method of accounting for deferred income taxes requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. At the end of 2011, we concluded that a portion of our deferred tax assets would be realized for U.S. federal tax loss carryforwards. As a result, we recorded an income tax benefit of $4.5 million, as well as a corresponding deferred tax asset on our financial statements. We released the remaining valuation allowances relating to U.S. federal loss carryforwards which reduced our income tax expense in the first half of 2012. For the quarter ended September 28, 2012, we recorded income tax expense of $1.8 million, which reflected a total income tax rate of 39.9% for certain federal and state taxes. For the quarter ended September 30, 2011, we recorded income tax expense of $176 thousand, which reflected an estimated annual tax rate of 3.9% for certain state and foreign taxes.

For income tax purposes, as of September 28, 2012, we have $33.7 million of U.S. federal net operating loss carryforwards, most of which will expire by 2022 if not utilized. As of September 28, 2012, we had $12.9 million of foreign net operating loss carryforwards. Most of the foreign net operating losses can be carried forward indefinitely. A valuation allowance continues to be provided for substantially all of the foreign operating loss carryforwards.

For the nine months ended September 28, 2012, we recorded income tax expense of $2.3 million, which reflected a tax rate of 18.5% for certain federal, foreign and state taxes. For the nine months ended September 30, 2011, we recorded income tax expense of $448 thousand, which reflected an estimated annual tax rate of 3.6% for certain state and foreign taxes.

Liquidity and Capital Resources

As of September 28, 2012 and December 30, 2011, we had $14.5 million and $32.9 million, respectively, classified in cash and cash equivalents in the Consolidated Balance Sheets. During these same periods, we had $0.7 million and $0.9 million, respectively, on deposit with financial institutions that primarily served as collateral for amounts related to employee agreements. These deposit accounts have been classified as restricted cash on the Consolidated Balance Sheets.


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

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