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HACKETT GROUP, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) 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 December 31, 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 over 2,800 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 includes EPM Technologies. "ERP Solutions" encompasses our ERP technology groups, which include SAP and Oracle. The acquisition of Archstone Consulting in late 2009 brought a strong EPM Transformation group to Hackett. This allowed us to combine the acquired transformation skills with our existing technology EPM group, which has been one of The Hackett Group's growth drivers. The transformation and technology groups both adopted The Hackett Group brand in 2010, and in 2011 moved to a combined incentive plan. We have decided to recast the revenue of the EPM technology group, which was previously reflected under Technology Solutions, into The Hackett Group service line and recast all reported numbers, to best reflect this integration of brand and go-to-market focus in our reporting. 10-------------------------------------------------------------------------------- Table of Contents 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 Six Months Ended July 1, 2011 July 2, 2010 July 1, 2011 July 2, 2010 Revenue: Revenue before reimbursements $ 52,382 100.0 % $ 47,967 100.0 % $ 99,339 100.0 % $ 89,817 100.0 % Reimbursements 6,427 5,718 12,332 10,596 Total revenue 58,809 53,685 111,671 100,413 Costs and expenses: Cost of service: Personnel costs before reimbursable expenses 32,815 62.6 % 29,307 61.1 % 63,075 63.5 % 56,056 62.4 % Reimbursable expenses 6,427 5,718 12,332 10,596 Total cost of service 39,242 35,025 75,407 66,652 Selling, general and administrative costs 15,064 28.8 % 14,908 31.1 % 28,275 28.5 % 28,150 31.3 % Total costs and operating expenses 54,306 49,933 103,682 94,802 Income from operations 4,503 8.6 % 3,752 7.8 % 7,989 8.0 % 5,611 6.3 % Other income: Non-cash acquisition earn-out shares re-measurement gain - 784 - 1,727 Interest income 12 0.0 % 4 0.0 % 13 0.0 % 10 0.0 % Income before income taxes 4,515 8.6 % 4,540 9.5 % 8,002 8.1 % 7,348 8.2 % Income tax expense 112 0.2 % 117 0.2 % 272 0.3 % 227 0.3 % Net income $ 4,403 8.4 % $ 4,423 9.3 % $ 7,730 7.8 % $ 7,121 7.9 % Quarter Ended July 1, 2011 versus Quarter Ended July 2, 2010 Revenue. We are a global company with operations primarily in the United States, Western Europe and Australia. 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 did not have a material impact on our revenue comparisons between the quarters and six months ended July 1, 2011 and July 2, 2010. Total Hackett revenue increased 10% and 11% for the quarter and six months ended July 1, 2011, respectively, as compared to the quarter and six months ended July 2, 2010. The following table summarizes revenue (in thousands): Quarter Ended Six Months Ended July 1, July 2, July 1, July 2, 2011 2010 2011 2010 The Hackett Group $ 46,790 $ 45,179 $ 89,606 $ 85,078 ERP Solutions 12,019 8,506 22,065 15,335 Total Hackett revenue $ 58,809 $ 53,685 $ 111,671 $ 100,413 The Hackett Group revenue increased by 4% and 5% for the quarter and six months ended July 1, 2011, respectively, as compared to the quarter and six months ended July 2, 2010. The Hackett Group's international revenue, which is primarily based on the country of the contracting entity, accounted for 27% and 26% of The Hackett Group's total revenue for the quarter and six months ended July 1, 2011, respectively, as compared to 25% and 23% in the quarter and six months ended July 2, 2010, respectively. ERP Solutions revenue increased 41% and 44% for the quarter and six months ended July 1, 2011, respectively, as compared to the quarter and six months ended July 2, 2010, as a result of improved market demand for ERP technology related services. 11 -------------------------------------------------------------------------------- Table of Contents During the quarter and six months ended July 1, 2011, no customer accounted for more than 3%, of our total revenue. During the quarter ended July 2, 2010, two customers accounted for 6% and 7% of our total revenue, and during the six months ended July 2, 2010, two customers accounted for 6% 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 12%, or $3.5 million, and 13%, or $7.0 million, for the quarter and six months ended July 1, 2011, respectively, as compared to the quarter ended July 2, 2010, 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 to 63% and 64% for the quarter and six months ended July 1, 2011, respectively, from 61% and 62% for the quarter and six months ended July 2, 2010, respectively, primarily due to increased headcount. The Hackett Group generated gross margin as a percentage of revenue before reimbursements of 40% and 39% for the quarter and six months ended July 1, 2011, respectively, as compared to ERP Solutions, which generated gross margin as a percentage of revenue before reimbursements of 36% and 35%, respectively. Selling, General and Administrative. Selling, general and administrative costs were $15.1 million and $28.3 million for the quarter and six months ended July 1, 2011, respectively, and $14.9 million and $28.2 million for the quarter and six months ended July 2, 2010, respectively. Selling, general and administrative costs as a percentage of revenue before reimbursements were 29% for both the quarter and six months ended July 1, 2011, as compared to 31% for both the quarter and six months ended July 2, 2010, primarily due to selling, general and administrative leverage on increased revenue. Non-Cash Acquisition Earn-out Shares Re-measurement Gain. Fluctuations in the share price of our common stock and the reduction of earn-out shares resulted in non-cash gains in interim reporting periods until the final determination of the earn-out shares related to the Archstone acquisition was made in the second quarter of 2010. As a result, during the quarter and six months ended July 2, 2010, we recorded a non-cash re-measurement gain of $0.8 million and $1.7 million, respectively, in the consolidated statement of operations. Income Taxes. We recorded income tax expense of $112 thousand and $272 thousand for the quarter and six months ended July 1, 2011, respectively, which reflected an estimated annual tax rate of 2.5% and 3.4%, respectively, for certain foreign and state taxes. For the quarter and six months ended July 2, 2010, we recorded income taxes of $117 thousand and $227 thousand, respectively, which reflected estimated annual tax rates of 2.6% and 3.1%, respectively, for certain federal and state taxes. Liquidity and Capital Resources As of July 1, 2011 and December 31, 2010, we had $17.9 million and $25.3 million, respectively, classified in cash and cash equivalents in the accompanying consolidated balance sheets. During these same periods, we had $1.6 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): |