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HCKT > SEC Filings for HCKT > Form 10-K on 12-Mar-2014All Recent SEC Filings

Show all filings for HACKETT GROUP, INC.

Form 10-K for HACKETT GROUP, INC.


12-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Hackett, originally incorporated on April 23, 1997, 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 is a strategic advisory firm and a world leader in best practice research, benchmarking, business transformation and working capital management services which empirically defines and enables world-class enterprise performance. Hackett empirically defines world-class performance in sales, general and administrative and certain supply chain activities with analysis gained through more than 10,000 benchmark studies over 21 years at over 3,500 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, "Hackett" represents our total company. "The Hackett Group" encompasses our Benchmarking, Business Transformation and Executive Advisory groups, and includes Oracle EPM. "ERP Solutions" encompasses our SAP ERP group.

During the first quarter of 2013, we exited the Oracle ERP implementation practice, which is separate and distinct from our Oracle EPM practice. The transaction was not material to our consolidated financial statements, however, the following information has been recast to exclude activity related to the business.

Critical Accounting Policies

In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of results of operations and financial position in conformity with generally accepted accounting principles in the United States ("GAAP"). Actual results could differ significantly from those estimates under different assumptions and conditions. We believe the following discussion addresses our most critical accounting policies. These policies require management to exercise judgment on issues that are often difficult, subjective and complex due to the necessity of estimating the effect of matters that are inherently uncertain.

Revenue Recognition

Our revenue is principally derived from fees for services generated on a project-by-project basis. Revenue for services rendered is recognized on a time and materials basis or on a fixed-fee or capped-fee basis.

Revenue for time and materials contracts is recognized based on the number of hours worked by our consultants at an agreed upon rate per hour and is recognized in the period in which services are performed.

Revenue related to fixed-fee or capped-fee contracts is recognized on the proportional performance method of accounting based on the ratio of labor hours incurred to estimated total labor hours. This percentage is multiplied by the contracted dollar amount of the project to determine the amount of revenue to be recognized in an accounting period. The contracted dollar amount used in this calculation excludes the amount the client pays us for reimbursable expenses. There are situations where the number of hours to complete projects may exceed our original estimate, as a result of an increase in project scope, unforeseen events that arise, or the inability of the client or the delivery team to fulfill their responsibilities. On an on-going basis, our project delivery, Office of Risk Management and finance personnel review hours incurred and estimated total labor hours to complete projects. Any revisions in these estimates are reflected in the period in which they become known. If our estimates indicate that a contract loss will occur, a loss provision will be recorded in the period in which the loss first becomes probable and reasonably estimable. Contract losses are determined to be the amount by which the estimated direct costs of the contract exceed the estimated total revenue that will be generated by the contract. These costs are included in total cost of service.

Revenue from advisory services is recognized ratably over the life of the client agreements.

Revenue for contracts with multiple elements is allocated based on the selling price of the elements.

Additionally, we earn revenue from the resale of software licenses and maintenance contracts. Revenue for the resale of software and software licenses is recognized upon contract execution and customer receipt of software. Revenue from maintenance contracts is recognized ratably over the life of the agreements.


Unbilled revenue represents revenue for services performed that have not been invoiced. If we do not accurately estimate the scope of the work to be performed, or we do not manage our projects properly within the planned periods of time, or we do not meet our clients' expectations under the contracts, then future consulting margins may be negatively affected or losses on existing contracts may need to be recognized. Any such reductions in margins or contract losses could be material to our results of operations.

Sales tax collected from customers and remitted to the applicable taxing authorities is accounted for on a net basis, with no impact on revenue.

Revenue before reimbursements excludes reimbursable expenses charged to clients. Reimbursements, which include travel and out-of-pocket expenses, are included in revenue, and an equivalent amount of reimbursable expenses is included in cost of service.

The agreements entered into in connection with a project, whether time and materials, or fixed-fee or capped-fee based, typically allow our clients to terminate early due to breach or for convenience with 30 days' notice. In the event of termination, the client is contractually required to pay for all time, materials and expenses incurred by us through the effective date of the termination. In addition, from time to time we enter into agreements with our clients that limit our right to enter into business relationships with specific competitors of that client for a specific time period. These provisions typically prohibit us from performing a defined range of services which we might otherwise be willing to perform for potential clients. These provisions are generally limited to six to twelve months and usually apply only to specific employees or the specific project team.

Allowances for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from our clients not making required payments. Periodically, we review accounts receivable to assess our estimates of collectability. Management critically reviews accounts receivable and analyzes historical bad debts, past-due accounts, client credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our clients were to deteriorate, resulting in their inability to make payments, additional allowances may be required.

Long-Lived Assets (excluding Goodwill and Other Intangible Assets)

Long-lived assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset's carrying amount to determine if there has been an impairment. The amount of an impairment is calculated as the difference between the fair value of the asset and its carrying value. Estimates of future undiscounted cash flows are based on management's view of growth rates for the related business, anticipated future economic conditions and estimates of residual values.

Goodwill and Other Intangible Assets

Goodwill and intangible assets deemed to have indefinite lives are not amortized, but rather are tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate potential impairment. Finite-lived intangible assets are amortized over their useful lives and are subject to impairment evaluations. The excess cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill.

Goodwill is tested at least annually for impairment at the reporting unit level utilizing the market approach. The reporting units are The Hackett Group (including Benchmarking, Business Transformation, Business Transformation EPM, Strategy and Operations and Executive Advisory Programs) and Hackett Technology Solutions (including SAP ERP, and Oracle EPM). In assessing the recoverability of goodwill and intangible assets, we make estimates based on assumptions regarding various factors to determine if impairment tests are met. These estimates contain management's judgment, using appropriate and customary assumptions available at the time. As of December 27, 2013, neither of our reporting units were at risk of failing step one.

Other intangible assets are tested for potential impairment whenever events or changes in circumstances suggest that the carrying value of an asset may not be fully recoverable. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset's carrying amount to determine if there has been an impairment. The amount of an impairment is calculated as the difference between the fair value of the asset and its carrying value. Estimates of future undiscounted cash flows are based on management's view of growth rates for the related business, anticipated future economic conditions and estimates of residual values. Other intangible assets arise from business combinations and consist of customer relationships, customer backlog and trademarks that are amortized on a straight-line or accelerated basis over periods of up to five years.

Stock Based Compensation

We recognize compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards, with limited exceptions, over the requisite service period.


Restructuring Reserves

Restructuring reserves reflect judgments and estimates of our ultimate costs of severance, closure and consolidation of facilities and settlement of contractual obligations under our operating leases, including sublease rental rates, absorption period to sublease space and other related costs. We reassess the reserve requirements to complete each individual plan under our restructuring programs at the end of each reporting period. If these estimates change in the future or actual results differ from our estimates, we may be required to record additional charges.

Income Taxes

Deferred tax assets and liabilities are determined based on differences between the financial reporting carrying values and tax bases of assets and liabilities, and are measured by using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to reverse. Deferred income taxes also reflect the impact of certain state operating loss and tax credit carryforwards. A valuation allowance is provided if we believe it is more likely than not that all or some portion of the deferred tax asset will not be realized. An increase or decrease in the valuation allowance, if any, that results from a change in circumstances, and which causes a change in our judgment about the realizability of the related deferred tax asset, is included in the current tax provision.

We adopted a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. We report penalties and tax-related interest expense as a component of income tax expense.

Contingent Liabilities

We have certain contingent liabilities that arise in the ordinary course of our business activities. We accrue contingent liabilities when it is probable that future expenditures will be made, and when such expenditures can be reasonably estimated. Reserves for contingent liabilities are reflected in our consolidated financial statements based on management's assessment, along with legal counsel, of the expected outcome of the contingencies. If the final outcome of our contingencies differs adversely from that currently expected, it would result in income or a charge to earnings when determined.

The foregoing list was not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for us to judge the application. There are also areas in which our judgment in selecting any available alternative would not produce a materially different result. See our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K, which contain accounting policies and other disclosures required by GAAP.


Results of Operations

Our fiscal year generally consists of a 52-week period and periodically consists of a 53-week period as each fiscal year ends on the Friday closest to December 31. Fiscal years 2013, 2012 and 2011 ended on December 27, 2013, December 28, 2012 and December 30, 2011, respectively. References to a year included in this document refer to a fiscal year rather than a calendar year. 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):

                                                                   Year Ended
                                      December 27, 2013        December 28, 2012        December 30, 2011
Revenue:
Revenue before reimbursements       $   200,391    100.0%    $   199,749     100%    $     186,676    100.0%
Reimbursements                           23,439                   22,987                    22,387
Total revenue                           223,830                  222,736                   209,063

Costs and expenses:
Cost of service:
Personnel costs before
reimbursable expenses                   130,456     65.1%        125,912    63.1%          115,719     62.3%
Reimbursable expenses                    23,439                   22,987                    22,387
Total cost of service                   153,895                  148,899                   138,106

Selling, general and
administrative costs                     54,208     27.1%         56,997    28.5%           54,058     29.0%
Restructuring benefit                          -                    (211)                         -
Total costs and operating
expenses                                208,103                  205,685                   192,164

Operating income                         15,727      7.8%         17,051     8.5%           16,899      9.1%

Other (expense) income:
Interest (expense) income, net             (465)     -0.2%          (610)    -0.3%              33      0.0%

Income from continuing operations
before income taxes                      15,262      7.6%         16,441     8.2%           16,932      9.1%
Income tax expense (benefit)              6,398      3.2%           (478)    -0.2%          (4,495)     -2.3%
Income from continuing operations         8,864      4.4%         16,919     8.5%           21,427     11.4%
(Loss) income from discontinued
operations                                 (135)                    (222)                      342
Net income                          $     8,729      4.4%    $    16,697     8.4%    $      21,769     11.7%

Comparison of 2013 to 2012

Overview. We reported net income of $8.7 million in 2013 and $16.7 million in 2012. Net income in 2013 reflected tax expense of $6.4 million, whereas net income in 2012 included a net tax benefit of $0.5 million due to the release of $6.7 million of valuation allowance.

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, Euro and Australian Dollar, and as a result is affected by currency exchange rate fluctuations. The exchange rate fluctuations did not have a significant impact on comparisons between 2013 and 2012.

Hackett total revenue increased slightly in 2013, as compared to 2012. The following table summarizes revenue (in thousands):

                                Year Ended
                    December 27,         December 28,
                        2013                 2012

The Hackett Group  $       184,112     $        187,787
ERP Solutions               39,718               34,949

Total revenue      $       223,830     $        222,736


The Hackett Group revenue decreased 2% to $184.1 million in 2013, as compared to $187.8 million in 2012. The Hackett Group's international revenue, which is primarily based on the country of the contracting entity, accounted for 20% of The Hackett Group's total revenue in 2013, as compared to 22% in 2012. The Hackett Group's 2013 domestic revenue increased 1% from 2012, while the international revenue decreased 10% during the same time period. Although we experienced gradual economic improvement in the U.S. during 2013, Western Europe became increasingly more volatile. Our hopes that improved growth in Europe would result in increased demand did not materialize during 2013, as we experienced longer sales cycles and project deferrals in the second half of the year.

The ERP Solutions group revenue increased 14% to $39.7 million in 2013, as compared to $34.9 million in 2012, primarily due to increased demand across the SAP ERP group.

Reimbursements as a percentage of total revenue were 10% during both 2013 and 2012. In 2013 and 2012, no customer accounted for more than 5% of our total 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 4% to $130.5 million in 2013 from $125.9 million in 2012. Total cost of service before reimbursable expenses, as a percentage of revenue before reimbursements, increased slightly to 65% in 2013 from 63% in 2012. The increase in cost of service before reimbursable expenses was primarily due to greater utilization of subcontractors in our SAP ERP and Oracle EPM technology groups.

As a percentage of revenue before reimbursements, The Hackett Group generated net margins of 37% in both 2013 and 2012. As a percentage of revenue before reimbursements, ERP Solutions generated net margins of 36% in 2013 and 43% in 2012. The decrease in the ERP Solutions net margins was primarily due to the increased utilization of subcontractors in our SAP ERP group and a decrease in license sales in 2013, following strong license sales in 2012.

Selling, General and Administrative. Selling, general and administrative costs decreased 5% to $54.2 million in 2013 from $57.0 million in 2012. As a percentage of revenue before reimbursements, selling, general and administrative costs decreased to 27% in 2013 from 29% 2012, primarily due to cost containment initiatives implemented in 2013.

Restructuring Benefit. As of December 28, 2012, we no longer had any commitments relating to acquisition integration activities. Therefore during 2012, we reversed the existing accrued facilities restructuring liability of $0.2 million and recorded a corresponding facilities restructuring benefit in the consolidated statements of operations.

Income Taxes. In 2013, we recorded income tax expense of $6.4 million, which reflected an effective tax rate of 42.3% for certain federal, foreign and state taxes. In 2012, we recorded an income tax benefit of $0.5 million, which represented an effective tax rate benefit of 3.0% of our income before income tax, primarily due to the full release of a valuation allowance related to the U.S. federal and state net operating loss carryforwards and partial release of a valuation allowance related to the foreign net operating loss carryforward totaling $6.7 million.

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. In determining the need for valuation allowances we consider evidence such as history of losses and general economic conditions.

As of December 27, 2013, we had $16.5 million of U.S. federal net operating loss carryforwards, most of which will expire by 2022 if not utilized. During 2012 and 2011 there was a full release of the valuation allowance related to U.S. federal net operating loss carryforwards. As of December 27, 2013, we had $3.1 million of U.S. state net operating loss carryforwards. During 2012 there was a full release of the valuation allowance related to state net operating loss carryforwards.

As of December 27, 2013, we had $20.2 million of foreign net operating loss carryforwards, of which $15.2 million related to operations in the U.K., $1.4 million related to operations in France and $0.7 million related to operations in Germany. Most of the foreign net operating losses can be carried forward indefinitely. During 2012 there was a partial release of the valuation allowance related to the foreign net operating loss carryforwards. No valuation allowance was released in 2013 related to the foreign net operating loss carryforwards. A valuation allowance continues to be provide for some of the foreign operating loss carryforwards. See Note 10 to our consolidated financial statements included in this Annual Report on Form 10-K.

Comparison of 2012 to 2011

Overview. We reported net income of $16.7 million in 2012 and $21.8 million in 2011. Net income in 2012 and 2011 included a net tax benefit of $0.5 million and $4.5 million, respectively, due to the release of $6.7 million and $5.3 million of valuation allowance related to U.S. federal, state and foreign net operating loss carryforwards.


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, Euro and Australian Dollar, and as a result is affected by currency exchange rate fluctuations. The exchange rate fluctuations did not have a significant impact on comparisons between 2012 and 2011.

Hackett total revenue increased 7% in 2012, as compared to 2011. The following table summarizes revenue (in thousands):

                               Year Ended
                    December 28,        December 30,
                        2012                2011

The Hackett Group  $       187,787    $        181,824
ERP Solutions               34,949              27,239

                                  $                   $
Total revenue              222,736             209,063

The Hackett Group revenue increased 3% to $187.8 million in 2012, as compared to $181.8 million in 2011. The Hackett Group's international revenue, which is primarily based on the country of the contracting entity, accounted for 22% of The Hackett Group's total revenue in 2012, as compared to 24% in 2011.

The ERP Solutions group revenue increased 28% to $34.9 million in 2012, as compared to $27.2 million in 2011, primarily due to increased demand across the SAP ERP group.

Reimbursements as a percentage of total revenue were 10% and 11% during 2012 and 2011, respectively. In 2012 and 2011, no customer accounted for more than 5% of our total 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 9% to $125.9 million in 2012 from $115.7 million in 2011. The increase in cost of service before reimbursable expenses 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, increased slightly to 63% in 2012 from 62% in 2011. This increase was primarily due to the increased headcount discussed above. As a percentage of revenue before reimbursements, The Hackett Group generated net margins of 37% in 2012 and 39% in 2011. The decrease in The Hackett Group net margins was primarily due to the misalignment of resources with client demand. As a percentage of revenue before reimbursements, ERP Solutions generated net margins of 43% in 2012 and 42% in 2011. ERP Solutions net margins increased from 2011, primarily due to increased revenue across the SAP ERP group.

Selling, General and Administrative. Selling, general and administrative costs increased 5% to $57.0 million in 2012 from $54.1 million in 2011. As a percentage of revenue before reimbursements, selling, general and administrative costs were 29% during both 2012 and 2011.

Restructuring Benefit. As of December 28, 2012, we no longer had any commitments relating to acquisition integration activities. During 2012, we reversed the existing accrued facilities restructuring liability of $0.2 million and recorded a corresponding facilities restructuring benefit in the consolidated statements of operations. As of December 28, 2012, the remaining restructuring reserves of $0.2 million related to the partial restructuring of the San Francisco office and early vendor termination fees.

Income Taxes. In 2012, we recorded an income tax benefit of $0.5 million, which represented an effective tax rate benefit of 3.0% of our income before income tax, primarily due to the full release the valuation allowance related to the U.S. federal and state net operating loss carryforwards and partial release of the foreign net operating loss carryforward totaling $6.7 million. In 2011, we recorded an income tax benefit of $4.5 million, which represented an effective tax rate benefit of 26.0% of our income before income tax, primarily due to the partial release of the valuation allowance related to the U.S. federal net operating loss carryforward totaling $5.3 million.

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. In determining the need for valuation allowances we consider evidence such as history of losses and general economic conditions.

As of December 28, 2012, we had $31.9 million of U.S. federal net operating loss carryforwards, most of which will expire by 2022 if not utilized. During 2012 and 2011 there was a full release of the valuation allowance related to U.S. federal net


operating loss carryforwards. As of December 28, 2012, we had $3.9 million of U.S. state net operating loss carryforwards. During 2012 there was a full . . .

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