HACKETT GROUP, INC. - Quarter Report: 2011 July (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the quarterly period ended July 1, 2011

OR

For the transition period from              to             

Commission File Number 0-24343

The Hackett Group, Inc.

(Exact name of Registrant as specified in its charter)

(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):

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 August 3, 2011, there were 40,619,903 shares of common stock outstanding.

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The Hackett Group, Inc.

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PART I — FINANCIAL INFORMATION

The Hackett Group, Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

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)

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)

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 (“US 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 December 31, 2010 included in the Annual Report on Form 10-K filed by the Company with the SEC. The consolidated results of operations for the quarter ended July 1, 2011, 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 US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Fair Value

The Company’s financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable and unbilled revenue, accounts payable and accrued expenses and other liabilities.

As of July 1, 2011 and December 31, 2010, the fair value of all financial instruments approximated the respective fair value due to the short-term nature and maturity of these instruments.

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 services (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 adoption of ASU 2009-13 did not have a material impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (“ASU 2010-28”). ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. ASU 2010-28 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The adoption of ASU 2010-28 did not have an impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations, a consensus of the FASB Emerging Issues Task Force (“ASU 2010-29”). The objective of ASU 2010-29 is to address diversity in practice relating to the interpretation of pro forma revenue and earnings disclosure requirements for business combinations. Under ASU 2010-29, comparative financial statements should disclose revenue and earnings of the combined entity as if the business combinations that have occurred during the current year had been in effect as of the beginning of the comparable prior annual reporting period only. Additionally, ASU 2010-29 expands the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combinations included in reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively for business combinations acquired on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of ASU 2010-29 did not have an impact on the Company’s consolidated financial statements.

In June 2011, the FASB released ASU 2011-05 Comprehensive Income: Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires companies to present total comprehensive income, the components of net income, and the components of other comprehensive income in either a continuous statement or in two separate but consecutive statements. The amendments of ASU 2011-05 eliminate the option for companies to present the components of other comprehensive income within the statement of changes of shareholders’ equity. ASU 2011-05 is effective for fiscal years beginning after December 15, 2011. The Company is currently evaluating the impact of adopting ASU 2011-05.

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The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Reclassifications

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

2. Acquisitions and Investing Activities

Effective November 9, 2009, the Company acquired Archstone Consulting, LLC (“Archstone”) pursuant to an Asset Purchase Agreement under which the Company purchased from Archstone, Archstone Consulting UK Limited and Archstone Consulting BV (the “Sellers”) 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 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 were subject to an earn-out based on revenue achieved in 2010. 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 of $3.48, on the effective date of acquisition.

On May 11, 2010, prior to the end of the earn-out period, the Company and the Sellers agreed to the final earn-out determination of 1,435,000 unregistered shares, of the total 1,655,000 unregistered shares of common stock to be deemed earned, and therefore, 220,000 unregistered shares were forfeited by the Sellers. As a result of the fluctuation in the Company’s share price and earn-out share forfeitures, the Company recorded a non-cash re-measurement gain of $0.8 million and $1.7 million during the quarter and six months ended July 2, 2010, respectively, in accordance with FASB Accounting Standards Codification 805, Business Combinations, in the consolidated statement of operations.

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:

Approximately 0.9 million and 1.1 million shares, primarily related to options with exercise prices greater than the average market price of the Company’s common stock, were excluded from the computations of diluted net income per common share for the quarters ended July 1, 2011 and July 2, 2010, respectively, as their inclusion would be anti-dilutive.

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The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

4. Comprehensive Income

Comprehensive income is summarized below (in thousands):

5. Restructuring

As of July 1, 2011 and December 31, 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):

6. Accounts Receivable and Unbilled Revenue, Net

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

Accounts receivable is net of uncollected advanced billings. Unbilled revenue includes recognized recoverable costs and accrued profits on contracts for which billings had not been presented to clients.

7. Stock Based Compensation

During the quarter and six months ended July 1, 2011, the Company issued 51,000 and 1,825,038 restricted stock units, respectively, at a weighted average grant-date fair value of $4.19 and $3.64, respectively. As of July 1, 2011, the Company had 3,080,972 restricted stock units outstanding at a weighted average grant-date fair value of $3.35. As of July 1, 2011, there was $6.6 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 July 1, 2011, the Company had 810,237 shares of common stock subject to vesting requirements outstanding at a weighted average grant-date fair value of $3.38. As of July 1, 2011, there was $1.2 million of total stock compensation expense related to these shares for the nonvested awards not yet recognized. This stock compensation expense is expected to be recognized over a weighted average period of 2.53 years.

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The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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 July 1, 2011, the Company repurchased 830 thousand shares of its common stock at an average price of $4.38 for a total cost of $3.6 million. During the six months ended July 1, 2011, the Company repurchased 1.5 million shares of its common stock at an average price of $4.02, for a total cost of $6.0 million. As of July 1, 2011, the Company had $3.5 million available under its buyback program.

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 Company’s contracting entity and was attributed to the following geographical areas (in thousands):

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

As of July 1, 2011, foreign assets included $15.6 million of goodwill and $0.2 million of intangible assets related to acquisitions. As of December 31, 2010, foreign assets included $15.0 million of goodwill and $0.2 million of intangible assets related to acquisitions.

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

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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.

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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 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):

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.

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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):

Net cash provided by operating activities was $1.6 million for the six months ended July 1, 2011, as compared to $6.0 million for the six months ended July 2, 2010. During the six months ended July 1, 2011, net cash provided by operating activities was primarily attributable to net income, excluding non-cash activity, offset by the payout of 2010 incentive compensation awards and an increase in accounts receivable and unbilled revenue as a result of increased revenue.

During the six months ended July 2, 2010, net cash provided by operating activities was primarily attributable to net income, excluding non-cash activity, and a 14 day decrease in days sales outstanding from the end of the previous fiscal year.

Net cash used in investing activities was $3.3 million for the six months ended July 1, 2011, as compared to $1.6 million for the six months ended July 2, 2010. During the six months ended July 1, 2011, cash used in investing activities primarily related to capital expenditures for product development, as well as the global roll out of new laptops and other capital expenditures. During the six months ended July 2, 2010, cash used in investing mostly related to capital expenditures and an increase in cash on deposit with a financial institution as collateral for a letter of credit related to an operating lease.

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Net cash used in financing activities was $5.7 million for the six months ended July 1, 2011, as compared to $1.9 million for the six months ended July 2, 2010. Cash used in financing activities for the six months ended July 1, 2011 was mostly attributable to the repurchase of 1.5 million shares of our common stock at an average price of $4.02 per share, for a total cost of $6.0 million. Net cash used in financing activities for the six months ended July 2, 2010 was mostly attributable to the repurchase of 715 thousand shares of our common stock at an average price of $3.00 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 July 1, 2011, we had $3.5 million available under the buyback program.

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.

At July 1, 2011, 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.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in Internal 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

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.

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.

During the quarter ended July 1, 2011, the Company repurchased 830 thousand shares of its common stock at a cost of $3.6 million 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

See Index to Exhibits on page 16, 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.

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INDEX TO EXHIBITS

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