HACKETT GROUP, INC. - Quarter Report: 2015 October (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

 

FORM 10-Q

 

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the quarterly period ended October 2, 2015 

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 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  ☒    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.

 

 

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES    NO  ☒ 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of November  6, 2015,  there were 29,382,893 shares of common stock outstanding.

 

 

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The Hackett Group, Inc.

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

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PART I — FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

The Hackett Group, Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

 

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 COMPREHENSIVE INCOME

(in thousands)

(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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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 (“U.S. 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 U.S. GAAP for annual financial statements and should be read in conjunction with the consolidated financial statements and notes thereto for the year ended January 2, 2015, included in the Annual Report on Form 10-K filed by the Company with the SEC. The consolidated results of operations for the quarter and nine months ended October 2, 2015, 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 U.S. 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, accounts receivable and unbilled revenue, accounts payable, accrued expenses and other liabilities and debt. As of October 2, 2015 and January 2, 2015, the carrying amount of each financial instrument, with the exception of debt, approximated the instrument’s respective fair value due to the short-term nature and maturity of these instruments.

The Company uses significant other observable market data or assumptions (Level 2 inputs as defined in accounting guidance) that it believes market participants would use in pricing debt. The fair value of the debt approximated the carrying amount, using Level 2 inputs, due to the short-term variable interest rates based on market rates.

Business Combinations

The Company applies the provisions of ASC 805, Business Combinations, in the accounting for its acquisitions, which requires recognition of the assets acquired and the liabilities assumed at their acquisition date fair values, separately from goodwill. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition date fair values of the tangible and identifiable intangible assets acquired and liabilities assumed. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, its estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, that may be up to 12 months from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with a corresponding adjustment to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, the impact of any subsequent adjustments is included in the consolidated statements of operations.

 

Recently Issued Accounting Standards

In May 2014, the FASB issued guidance on revenue recognition, which provides for a single, principles-based model for revenue recognition and replaces the existing revenue recognition guidance. The guidance is effective for annual and interim periods beginning on or after December 15, 2017 and will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective. It permits the use of either a retrospective or cumulative effect transition method.  Early adoption is permitted, but not before December 15, 2016.  The Company has not yet selected a transition method and is in the process of evaluating the effect this standard will have on its consolidated financial statements and related disclosures.

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1. Basis of Presentation and General Information (continued)

In April 2015, the FASB issued amendments to ASU 2015-03, which are intended to simplify the balance sheet presentation of debt issuance costs.  These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts.  The recognition and measurement guidance for debt issuance costs are not affected by this update.  The amendments are effective for annual and interim periods beginning after December 15, 2015 and requires a retrospective transition method.  Early adoption is permitted for financial statements that have not been previously issued.   The Company does not expect the adoption to have a material impact on its 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.

 

2. 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 and restricted stock units issued to the Company’s employees and non-employee members of its Board of Directors, the calculation includes only the vested portion of such stock and units.

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 common shares:

 

 

 

 

 

Approximately 0.5 million and 0.4 million shares of common stock equivalents were excluded from the computations of diluted net income per common share for the quarters ended October 2, 2015 and September 26, 2014, respectively, as their inclusion would have had an anti-dilutive effect on diluted net income per common share.    

 

3. 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.

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   4. Accrued Expenses and Other Liabilities

        Accrued expenses and other liabilities consisted of the following (in thousands):

 

 

 

 

 

5. Restructuring Costs

The Company recorded restructuring costs of $3.6 million during the quarter ended March 28, 2014,  primarily for reductions in consultants and functional support personnel in Europe. These actions were taken as a result of the continued decline in demand in its European markets. The Company took steps to reduce its costs to better align its overall cost structure and organization with anticipated demand for its services.    

 

The following table sets forth the activity in the restructuring expense accruals (in thousands):

 

 

 

 

 

 

 

6. Credit Facility

On February 21, 2012, the Company entered into a credit agreement with Bank of America, N.A. ("Bank of America"), pursuant to which Bank of America agreed to lend the Company up to $20.0 million pursuant to a revolving line of credit (the “Revolver”) and up to $30.0 million pursuant to a five-year term loan (the “Term Loan”), which was used to finance the Company's $55.0 million tender offer for its shares in March 2012.  

On August 27, 2013, the Company amended and restated the credit agreement (the "Credit Agreement") with Bank of America to finance a  tender offer for shares of its common stock completed in October 2013. The Credit Agreement was amended and restated to:

The Amended Term Loan was used to finance the Company’s $6.9 million tender offer for its shares in October 2013.

The obligations of the Company under the Credit Facility are guaranteed by the active existing and future material U.S. subsidiaries of the Company and are secured by substantially all of the existing and future property and assets of the Company (subject to certain exceptions).

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The interest rates per annum applicable to loans under the Credit Facility will be, at the Company’s option, equal to either a base rate or a LIBOR base rate, plus an applicable margin percentage. The applicable margin percentage is based on the consolidated leverage ratio, as defined in the Credit Agreement. As of October 2, 2015, the applicable margin percentage was 1.50% per annum based on the consolidated leverage ratio, in the case of LIBOR rate advances, and 0.75% per annum, in the case of base rate advances. 

The Term Loan requires the amortization of principal payments in equal quarterly installments beginning December 31, 2013 through August 27, 2018, unless payments are made in advance. The Company is subject to certain covenants, including total consolidated leverage, fixed cost coverage and liquidity requirements, each as set forth in the Credit Agreement, subject to certain exceptions.

 

7. Acquisition

During the quarter ended March 28, 2014, the Company acquired the U.S., Canada and Uruguay operations of Technolab International Corporation ("Technolab").  

At closing, the Seller received $3.0 million in cash, not subject to vesting, and $1.0 million in shares subject to vesting, which is being recorded as non-cash compensation over the service vesting period.  The seller also had the ability to earn an additional $8.0 million in a combination of cash, not subject to service vesting, and stock, subject to service vesting, based on a one-year profitability-based earn-out contingent upon actual results achieved.  The entire cash portion of the earn-out was recorded as compensation expense in 2014, of which $0.9 million and $2.6  million was recorded in the third quarter and first nine months of 2014,  respectively.  The stock portion of the earn-out is being recorded as compensation expense over the service vesting period. During the third quarter of 2015, the Company settled the contingent earn-out with cash and stock issuances in accordance with the agreement.

The purchase accounting resulted in a bargain purchase gain of $3.0 million on the acquisition and intangible assets with definite lives of $7.7 million which will be amortized over periods ranging from 2 years to 5 years.

 

8. Stock Based Compensation

During the nine months ended October 2, 2015, the Company issued 730,237 restricted stock units at a weighted average grant-date fair value of $8.36 per share. As of October 2, 2015, the Company had 2,185,728 restricted stock units outstanding at a weighted average grant-date fair value of $6.73 per share. As of October 2, 2015,  $8.1 million of total restricted stock unit compensation expense related to unvested awards had not been recognized and is expected to be recognized over a weighted average period of approximately 1.95 years. 

During the quarter ended October 2, 2015,  483,051 shares of common stock subject to vesting requirements were granted for the settlement of the contingent earn-out consideration related to the 2014 acquisition of Technolab.  As of October 2, 2015, the Company had 747,525 shares of common stock subject to vesting requirements outstanding at a weighted average grant-date fair value of $8.77 per share. As of October 2, 2015,  $4.5 million of compensation expense related to common stock subject to vesting requirements had not been recognized and is expected to be recognized over a weighted average period of approximately 2.9 years.  

On February 8, 2012, the Compensation Committee approved the fiscal year 2012 through 2015 equity compensation target for the Company’s Chief Executive Officer and Chief Operating Officer. Under this target, a single performance-based option grant was made to the Company’s Chief Executive Officer and the Chief Operating Officer of 1,912,500 options and 1,004,063 options, respectively, totaling 2,916,563 options, each with an exercise price of $4.00 and a fair value of $1.31.  One-half of the options would have vested upon the achievement of at least 50% growth of pro forma earnings per share and the remaining half would have vested upon the achievement of at least 50% pro forma EBITDA growth. Each metric could have been achieved at any time during the six-year term of the award based on a trailing twelve month period measured quarterly. The grants would have expired if neither target were achieved during the six-year term. The base year for the performance calculation was fiscal 2011 for both pro forma earnings per share and pro forma EBITDA performance targets.

In March of 2013, these performance-based stock option grants were surrendered by the Company’s Chief Executive Officer and Chief Operating Officer and replaced with performance-based SARs, equal to the number of options. The terms and conditions and the specific performance targets applicable to the SARs are the same as those applicable to the replaced options, with the exception that the SARs will be settled in cash, stock or any combination thereof, at the Company’s discretion.

Subsequent to year end 2014, in connection with the Company’s achievement of over 50% growth of pro forma net earnings per share since fiscal 2011 base year and upon the approval of the Audit Committee’s review of the Company’s 2014 financial statements and Annual Report on Form 10-K, 50% of the outstanding SARs awards granted to the CEO and COO became vested. In the third quarter of 2015, the Company recorded $1.3 million of compensation expense related to the SARs awards tied to the pro forma EBITDA performance target, which represented 50% of the total non-cash compensation expense assuming the awards fully vest. These awards have not yet vested. 

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9. Shareholders’ Equity  

         Treasury Stock

Under the Company’s share repurchase plan, the Company may buy back shares of its outstanding stock either on the open market or through privately negotiated transactions subject to market conditions and trading restrictions. During the nine months ended October 2, 2015, the Company repurchased approximately 149 thousand shares of its common stock at an average price of $9.10 per share for a total cost of approximately $1.4 million.     The shares repurchased under the share repurchase plan during the nine months ended October 2, 2015, do not include 281 thousand shares for a cost of $2.2 million that the Company bought back to satisfy employee net vesting obligations.   During the quarter ended October 2, 2015, the Company bought back 5 thousand shares at a cost of $65 thousand to satisfy employee net vesting obligations and no shares were repurchased under the share repurchase plan.  As of October 2, 2015, the Company had approximately $2.3 million available under its share repurchase plan authorization.

During the quarter ended September 26, 2014, the Company repurchased approximately 485 thousand shares of its common stock at an average price of $6.13 per share for a total cost of approximately $3.0 million under the share repurchase plan.   During the nine months ended September 26, 2014, the Company repurchased approximately 1.7 million shares of its common stock at an average price of $6.07 per share for a total cost of approximately $10.3 million under the share repurchase plan.  The shares repurchased during the quarter and nine months ended September 26, 2014, do not include 2 thousand shares at a cost of $12 thousand and 446 thousand shares at a cost of $2.7 million, respectively, that the Company bought back to satisfy employee net vesting obligations.    

Dividend Program

During the quarter ended October 2, 2015, the Company paid its first semi-annual dividend of $0.10 per share totaling $3.1 million to shareholders on record as of June 29, 2015. Subsequent to the quarter ended October 2, 2015, the Company declared its second semi-annual dividend of $0.10 per share for holders of record on December 28, 2015. The dividend will be paid on January 8, 2016.

 

10. 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.

 

11. Geographic and Group Information

 Revenue, which is primarily based on the country of the contracting entity and differs from the Company’s non-GAAP reporting, was attributed to the following geographical areas (in thousands):

 

 

        

 Long-lived assets are attributable to the following geographic areas (in thousands):

 

 

 

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As of October 2, 2015 and January 2, 2015, foreign assets included $14.5 million and $15.0 million, respectively, of goodwill related to the REL and Archstone acquisitions.  

 

 

In the following table, the Hackett Group service group encompasses Benchmarking, Business Transformation, Executive Advisory and EPM and EPM Application Maintenance and Support groups.  The ERP Solutions service group encompasses SAP ERP Technology and SAP Maintenance groups (in thousands):

 

 

 

 

 

 

 

 

 

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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 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, interest rates and our ability to obtain debt financing through additional borrowings under an amendment to our existing credit facility. An additional description of our risk factors is set forth in our Annual Report on Form 10-K for the year ended January 2, 2015. 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 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. Only Hackett empirically defines world-class performance in sales, general and administrative and certain supply chain activities with analysis gained through more than 11,000 benchmark studies over 21 years at over 3,500 of the world’s leading companies.

In the following discussion, “The Hackett Group” encompasses our Benchmarking, Business Transformation, Executive Advisory, Enterprise Performance Management ("EPM") and EPM Application Maintenance and Support ("AMS") groups. “ERP Solutions” encompasses our SAP ERP Implementation and SAP AMS groups. 

RESULTS OF OPERATIONS

        Adjusted non-GAAP information is provided to enhance the understanding of the Company’s financial performance and is reconciled to the Company’s GAAP information in the tables below.  In our quarterly earnings announcements, we refer to adjusted non-GAAP information as “pro-forma”, which is unaudited. 

References to adjusted non-GAAP results in the table below exclude non-cash stock compensation expense, intangible asset amortization expense, other one-time acquisition related income and expense and restructuring charges,  and assume a normalized tax rate, which is our long term projected cash tax rate.    These non-GAAP results are provided to enhance investors’ understanding of the Company's current financial performance and its prospects for the future. The Company believes the non-GAAP results provide useful information to both management and investors by excluding certain expenses that it believes are not indicative of its core operating results. The non-GAAP measures are included to provide investors and management with an alternative method for assessing operating results in a manner that is focused on the performance of ongoing operations and to provide a more consistent basis for comparison between quarters.  Further, these non-GAAP results are one of the primary indicators management uses for planning and forecasting in future periods.  In addition, since the Company has historically reported non-GAAP results to the investment community, it believes the continued inclusion of non-GAAP results provides consistency in its financial reporting. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.    

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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):

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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. Variances excluding the impact of currency fluctuations are reflected as constant currency.  The ERP Solutions group was not impacted by foreign currency rate fluctuations. In addition, revenue is analyzed based on geographical location of engagement team personnel. 

Total Company revenue increased 11%, or 13% when adjusting for constant currency, to $67.2 million during the quarter ended October 2, 2015,  as compared to $60.4 million during the quarter ended September 26, 2014.  Total Company revenue increased 10%, or 13% when adjusting for constant currency, to $194.6 million during the nine months ended October 2, 2015, as compared to $176.4 million during the nine months ended September 26, 2014.

 

 

The Hackett Group U.S. revenue increased 25% and 18%  during the quarter and nine months ended October 2, 2015,  respectively, as compared to the quarter and nine months ended September 26, 2014.  The Hackett Group’s international revenue decreased 23% and 3% during the quarter and nine months ended October 2, 2015,  respectively, as compared to the quarter and nine months ended September 26, 2014.   The Hackett Group’s international revenue accounted for 14%, or 16% in constant currency, of total Company revenue for the quarter ended October 2, 2015, as compared to 21% of total Company revenue for the quarter ended September 26, 2014.  The Hackett Group’s international revenue accounted for 16%, or 18% in constant currency, of total Company revenue for the nine months ended October 2, 2015, as compared to 18% of total Company revenue for the nine months ended September 26, 2014. 

ERP Solutions revenue was flat when comparing the quarters ended October 2, 2015 and September 26, 2014 and down 3% when comparing the nine months ended October 2, 2015 and September 26, 2014. The decrease in the comparison of the nine month periods was primarily due to a significant software sale transaction in 2014.  Assuming normalized software sales, ERP Solutions revenue grew 9%  during the nine months ended October 2, 2015, as compared to the nine months ended September 26, 2014.    

During the quarter and nine months ended October 2, 2015, and September 26, 2014, no customer accounted for more than 5% of total Company revenue. 

Cost of Service. Cost of service primarily consists of salaries, benefits and incentive compensation for consultants and subcontractor fees; acquisition-related compensation costs; non-cash stock compensation expense; and reimbursable expenses associated with projects.  

Personnel costs before reimbursable expenses increased 8%, or $2.8 million, and 7%, or $6.6 million for the quarter and nine months ended October 2, 2015,  respectively, as compared to the quarter and nine months ended September 26, 2014.  This increase primarily reflected increased employee headcount and higher subcontractor costs to support increasing revenue and higher incentive compensation commensurate with Company performance.   Total personnel costs before reimbursable expenses, as a percentage of revenue before reimbursements, were 60% and 61% for the quarter and nine months ended October 2, 2015, respectively, as compared to 61% and 63% for the quarter and nine months ended September 26, 2014, respectively.  

Total company adjusted non-GAAP gross margin was 39.6% of net revenue in the quarter ended October 2, 2015, as compared to 38.7% for the quarter ended September 26, 2014. Total Company adjusted non-GAAP gross margin was 39.0% of net revenue for the nine months ended October 2, 2015, as compared to 37.3% for the nine months ended September 26, 2014.  In 2014, we had a significant software sale transaction in our ERP Solutions groups. Assuming normalized software sales in 2014, the total company non-GAAP gross margins would have been 36.0% for the nine months ended September 26, 2014. The comparison to this normalized gross margin better reflects the margin improvements achieved primarily as a result of increased utilization and rates as compared to the prior year.

Non-cash compensation expense, included in cost of service, increased $0.8 million and $1.6 million during the quarter and nine months ended October 2, 2015, respectively, primarily due to a one-time acceleration of an unvested award to a terminated employee, as well as the impact of historical equity awards on the current year.

Selling, General and Administrative Costs (SG&A).  SG&A costs were $14.6 million and $43.5 million for the quarter and nine months ended October 2, 2015,  respectively, as compared to $14.1 million and $41.3 million for the quarter and nine months ended September 26, 2014, respectively.  The increase for the nine months comparison is primarily due to higher selling-related expenses and incentive compensation accruals commensurate with Company performance. SG&A costs as a percentage of revenue before reimbursements were 24% and 25% for the quarter and nine months ended October 2, 2015,  respectively, as compared to 26% for both the quarter and nine months ended September 26, 2014 due to the improved leverage from increased revenue.

Non-cash compensation expense, included in SG&A, increased $1.3 million and $1.0 million during the quarter and nine months ended October 2, 2015, respectively, primarily due to the accrual related to the unvested SARs tied to the pro-forma EBITDA performance target of $1.3 million, which represented 50% of the total non-cash compensation expense assuming the awards fully vest. See Note 8, "Stock Based Compensation," to our consolidated financial statements included in this Quarterly Report on Form 10-Q for more information.

Bargain Purchase Gain from Acquisition. During the first quarter of 2014, we acquired and accounted for certain assets and liabilities of Technolab International Corporation (“Technolab”).  At closing, the Seller received $3.0 million in cash, not subject to

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vesting, and $1.0 million in stock, subject to service vesting. Additionally, the seller had the ability to earn up to $8.0 million in a combination of cash, not subject to service vesting, and stock, subject to service vesting, based on a one year profitability based earn-out.  The amounts paid to the Seller at closing in stock, as well as the amounts earned as part of the earn-out due to the Seller in cash, not subject to service vesting, and stock, subject to service vesting, were accounted for as compensation expense. During the quarter ended October 2, 2015, we settled the contingent earn-out with cash and issued equity in accordance with the purchase agreement.

Restructuring Costs. During the quarter ended March 28, 2014, we recorded restructuring costs of $3.6 million, primarily for reductions of consultants and office leases in Europe. These actions were taken as a result of our continued volatility in demand in our European markets.   

Income Taxes. In the quarter and nine months ended October 2, 2015, we recorded income tax expense of $1.8 million and $5.5 million, respectively, which reflected a tax rate of 37% and 36%, respectively, for certain federal, foreign and state taxes. In the quarter and nine months ended September 26, 2014, we recorded income tax expense of $0.9 million and $1.7 million, respectively, which reflected a tax rate of 23%  and 22%, respectively, for certain federal, foreign and state taxes. The increase in tax for the quarter and nine months ended October 2, 2015, as compared to the quarter and nine months ended September 26, 2014, was primarily the result of the geographical mix of taxable earnings.

 Liquidity and Capital Resources 

As of October 2, 2015 and January 2, 2015, we had $16.3 million and $14.6 million, respectively, classified in cash and cash equivalents on the consolidated balance sheets.  

 

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

 

Cash Flows from Operating Activities

Net cash provided by operating activities was $19.2 million during the nine months ended October 2, 2015, as compared to $1.2 million during the nine months ended September 26, 2014.   In 2015, the net cash  provided was primarily due to net income adjusted for non-cash items and increased accrued liabilities related to higher incentive compensation accruals, partially offset by an increase in accounts receivable and unbilled revenue. In addition, the 2015 cash flow from operations was negatively impacted by the $3.4 million settlement of the cash portion of the EPM AMS acquisition consideration which was reflected as compensation expense.  In 2014,  the net cash provided was primarily due to net income adjusted for non-cash items, primarily offset by an increase in accounts receivable and unbilled revenue.    

Cash Flows from Investing Activities

Net cash used in investing activities was $2.4 million and $4.3 million during the nine months ended October 2, 2015 and September 26, 2014, respectively. Net cash used in investing activities during the nine months ended October 2, 2015 was primarily due to capital expenditures for the continued development of benchmark technology.  Net cash used in investing activities during the nine months ended September 26, 2014,  was primarily related to net cash consideration paid for the EPM AMS acquisition and capital expenditures for the development of the Hackett Performance Exchange. 

Cash Flows from Financing Activities

Net cash used in financing activities was $15.1 million during the nine months ended October 2, 2015, primarily due to the principal pay-down of $11.5 million of debt under our Credit Facility, the cost of share purchases to satisfy employee net vesting requirements of $2.2 million and the repurchase of $1.4 million of Company stock.  Net cash used in financing activities during the nine months ended September 26, 2014,  was primarily due to the repurchase of $10.3 million of Company stock and the cost of share purchases to satisfy employee net vesting requirements of $2.7 million, partially offset by net $7.8 million of borrowings under our Credit Facility.

The Company is party to an amended and restated the credit agreement (the "Credit Agreement") dated August 27, 2013 with Bank of America, N.A.  The Credit Agreement provides for a term loan (the “Amended Term Loan”) and a revolving line of credit (the “Revolver” and together with the Amended Term Loan, the “Credit Facility”).  As of October 2, 2015, the Company had $9.3 million principal amount outstanding on the Amended Term Loan and no outstanding balance on the Revolver.  See Note 6, "Credit Facility," to our consolidated financial statements included in this Quarterly Report on Form 10-Q for more information.

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We believe that available funds (including the cash on hand and $20.0 million in borrowing capacity under the Revolver), 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 a discussion of recently issued accounting standards, see Note 1, "Basis of Presentation and General Information," to our consolidated financial statements included in this Quarterly Report on Form 10-Q and Note 1, "Basis of Presentation and General Information," to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 2, 2015.  

Item  3.Quantitative and Qualitative Disclosures About Market Risk.

As of October 2, 2015, our exposure to market risk related primarily to changes in interest rates and foreign currency exchange rate risks.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to the Credit Facility, which is subject to variable interest rates. The interest rates per annum applicable to loans under the Credit Facility will be, at our option, equal to either a base rate or a LIBOR rate for one-, two-, three- or nine-month interest periods chosen by us in each case, plus an applicable margin percentage. A 100 basis point increase in our interest rate under our Credit Facility would not have had a material impact on our results of operations for the quarter ended October 2, 2015.  

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, the Euro and the Australian Dollar. These exposures may change over time as business practices evolve.

Item 4.Controls and Procedures

The Company maintains disclosure controls and procedures (“DCP”) that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (“the Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), as appropriate, to allow for timely decisions regarding required disclosure.

 

The Company, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s DCP as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by the Quarterly Report on Form 10-Q.

 

At the time that the Company’s Annual Report on Form 10-K for the year ended January 2, 2015 was filed on March 18, 2015, the Company’s Chief Executive Officer and Chief Financial Officer concluded that its DCP were effective as of January 2, 2015. However, at that time, the Company’s independent registered certified public accounting firm identified a material weakness in the Company’s internal controls over financial reporting (“ICFR”) due to the Company’s failure to design and maintain controls related to accounting for business combinations. On May 13, 2015 and August 12, 2015 when the Company’s Quarterly Reports on Form 10-Q for the quarters ended April 3, 2015 and July 3, 2015 were filed, the Company’s Chief Executive Officer and Chief Financial Officer concluded that its DCP were effective as of April 3, 2015 and July 3, 2015.

 

Subsequent to these evaluations, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, re-evaluated its conclusions reached and have now determined that the control deficiency previously identified rose to the level of a material weakness in ICFR as of January 2, 2015, April 3, 2015 and July 3, 2015, and therefore concluded that its ICFR were not effective at those times. See below for a discussion of the material weakness in ICFR.  Therefore, management concluded that the Company’s DCP were also not effective as of January 2, 2015, April 3, 2015 and July 3, 2015 because of the material weakness in the Company’s ICFR.

 

As described below, since the Company’s management concluded that the material weakness had been remediated, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s DCP were effective as of October 2, 2015.

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Material weakness in internal control over financial reporting (ICFR)

A material weakness is a deficiency, or combination of deficiencies, in ICFR, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management identified the following control deficiency that constituted a material weakness in the Company’s ICFR as of January 2, 2015. Management also determined that this material weakness existed as of April 3, 2015 and July 3, 2015:

The Company did not design and maintain controls to analyze and record appropriate adjustments related to accounting for business combinations. During the first quarter of 2014, the Company acquired and accounted for certain assets and liabilities of Technolab International Corporation. Subsequent to fiscal year end 2014, the amounts paid to the Seller at closing in stock, subject to service vesting, as well as the amounts earned as part of the earn-out due to the Seller in cash, not subject to service vesting, and stock, subject to service vesting, which were each originally treated as purchase consideration were adjusted and accounted for as compensation expense.

This material weakness resulted in adjustments the Company recorded in the fourth quarter, as well as additional disclosures in the consolidated financial statements. This control deficiency did not result in a material misstatement to the Company’s consolidated financial statements for the year ended January 2, 2015 or to the unaudited interim condensed consolidated financial statements for the quarters ended April 3, 2015 and July 3, 2015. However, management concluded that this control deficiency, if un-remediated, could have, in future reporting periods, resulted in a material misstatement to the annual or interim consolidated financial statements that would not have been prevented or detected by its controls. Accordingly, management has determined that this control deficiency constituted a material weakness.

Changes in internal control over financial reporting

 

As a result of the material weakness in ICFR, during the third quarter of fiscal 2015, the Company’s management implemented changes to its ICFR to improve the control environment, specifically with regard to business combinations.  The changes to the control environment include, but are not limited to, the following:

 

 

 

 

These remediation initiatives enhanced the Company's ICFR by establishing a formal process and specific control activities with regard to business combinations.  Management believes that the measures described above implemented during the period have remediated the material weakness identified above.  Other than as noted above, there were no other changes in the Company’s ICFR during our most recently completed fiscal quarter.     

 

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 Annual Report on Form 10-K for the year ended January 2, 2015.  

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Item  2.         Unregistered Sales of Equity Securities and Use of Proceeds.  

Issuer Purchases of Equity Securities

During the quarter ended October 2, 2015, the Company did not repurchase any shares of its common stock under the repurchase plan approved by the Company's Board of Directors. As of October 2, 2015, the Company had approximately $2.3 million of authorization under the plan.

 

 

Shares repurchased under the repurchase plan approved by the Company's Board of Directors do not include  5 thousand shares for a cost of $65 thousand and 281 thousand shares for cost of $2.2 million, that the Company bought back  to satisfy employee net vesting obligations for the quarter and nine months ended October 2, 2015, respectively.   

 

 

Item  6.Exhibits.

See Index to Exhibits on page 21, which is incorporated herein by reference.

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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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