HACKETT GROUP, INC. - Quarter Report: 2016 April (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 April 1, 2016 

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 May 6, 2016, there were 28,706,194 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 1, 2016, 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 April 1, 2016, 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 April 1, 2016 and January 1, 2016, the carrying amount of each financial instrument 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 and early adoption is permitted, however 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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In April 2015, the FASB issued amendments to its guidance 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. This adoption did not have a material impact on the Company’s consolidated financial statements.

On November 20, 2015, the FASB issued guidance which requires an entity to present all deferred tax assets and liabilities as non-current in a classified balance sheet. The update becomes effective January 1, 2017, however early adoption is permitted. The Company chose early adoption for the periods presented.

In February 2016, the FASB issued guidance on leases which supersedes the current lease guidance. The core principle requires lessees to recognize the assets and liabilities that arise from nearly all leases in the statement of financial position. Accounting applied by lessors will remain largely consistent with previous guidance, additional changes set to align lessor accounting with the revised lessee model and the FASB’s revenue recognition guidance. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact of this standard on its consolidated financial statements.

In March 2016, the FASB issued guidance on employee share-based payment accounting,  The goal of which is to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This update becomes effective for annual and interim periods beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of this new guidance.

Reclassifications

Certain prior period amounts in the consolidated financial statements, and notes thereto, have been reclassified to conform to current period presentation. The Company reclassified on the Consolidated Statements of Cash Flows the dollar value of shares having a value equal to tax withholding, which were withheld and never issued. In lieu of issuing the shares, taxes were paid on the employee’s behalf. In the first quarter of 2016 and 2015, $3.4 million and $2.1 million, respectively, related to the net shares withheld was reclassified from cash flows from operations to cash flows from financing activities to conform to current period presentation.



 

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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 0.9 million and 0.6 million shares of common stock equivalents were excluded from the computations of diluted net income per common share for the quarters ended April 1, 2016 and April 3, 2015, 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. Credit Facility

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 $47.0 million pursuant to a Term Loan. During 2015 the Company paid off the remaining balance on both the Term Loan and Revolver. As of April 1, 2016 and January 1, 2016, the Company had fully utilized and paid off its Term Loan and had no outstanding balance on the Revolver.

On May 9, 2016, the Company amended and restated the credit agreement with Bank of America to:

The obligations of Hackett under the Credit Facility are guaranteed by active existing and future material U.S. subsidiaries of Hackett (the “U.S. Subsidiaries”), and are secured by substantially all of the existing and future property and assets of Hackett and the U.S. Subsidiaries, a 100% pledge of the capital stock of the U.S. Subsidiaries, and a 66% pledge of the capital stock of Hackett’s direct foreign subsidiaries (subject to certain exceptions).

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 April 1, 2016, 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 Company is subject to certain covenants, including total consolidated leverage, fixed cost coverage, adjusted fixed cost coverage and liquidity requirements, each as set forth in the Credit Agreement, subject to certain exceptions.



6. 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 earned 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 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.

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7. Stock Based Compensation

During the nine months ended April 1, 2016, the Company issued 533,059 restricted stock units at a weighted average grant-date fair value of $13.32 per share. As of April 1, 2016, the Company had 1,908,599 restricted stock units outstanding at a weighted average grant-date fair value of $9.06 per share. As of April 1, 2016,  $12.7 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 2.17 years.

During the quarter April 1, 2016,  240,820 shares of common stock subject to vesting requirements were issued. These shares related to the consideration for the 2014 acquisition of Technolab.  As of April 1, 2016, the Company had 505,060 shares of common stock subject to vesting requirements outstanding at a weighted average grant-date fair value of $10.95 per share. As of April 1, 2016,  $3.9 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 2.3 years.



8. Shareholders’ Equity  

Stock Appreciation Rights (“SARs”)     

In 2012, the Company’s CEO and COO agreed to give up 50% of their equity incentive compensation awards for Plan years 2012 through 2015 in exchange for 2.9 million SARs with an exercise price of $4.00, only to be earned upon the achievement of 50% growth in pro forma earnings per share and 50% growth in pro forma EBITDA from a base year of 2011.  The grants would have expired if neither target were achieved during a six-year term. 



In the first quarter of 2015, the outstanding SARs awards for the achievement of 50% growth in pro forma earnings per share vested with the Audit Committee’s approval of the Company’s 2014 financial statements. In the first quarter of 2016, the outstanding SARs awards for the Company’s achievement of over 50% growth of pro forma EBITDA vested with the Audit Committee’s approval of the Company’s 2015 financial statements.  As of April 1, 2016, no SARs had been exercised. As of January 1, 2016, all non-cash stock compensation expense relating to the outstanding SARs had been expensed.



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 quarter ended April 1, 2016, the Company repurchased 307 thousand shares of its common stock at an average price of $13.85 per share for a total cost of $4.3 million. As of April 1, 2016, the Company had $3.1 million available under its share repurchase plan authorization. During the quarter ended April 3, 2015, the Company repurchased approximately 75 thousand shares of its common stock at an average price of $8.70 per share for a total cost of approximately $0.7 million.

The shares repurchased under the share repurchase plan during the quarter ended April 1, 2016, do not include 255 thousand shares for a cost of $3.4 million which the Company bought back to satisfy employee net vesting obligations.   During the quarter ended April 3, 2015,  the Company bought back 259 thousand shares at a cost of $2.1 million to satisfy employee net vesting obligations.

On May 6, 2016, the Company’s Board of Directors approved the repurchase of 697 thousand shares of its common stock from the Company’s CEO, 732 thousand shares of its common stock from the Company’s COO, and 73 thousand shares of its common stock from the Company’s CFO for a total of approximately 1.5 million shares at a purchase price of $14.77 per share. The transaction was approved by the Audit Committee of the Board of Directors which is comprised solely of independent directors and was effected as part of the Company’s share repurchase program.  Following the transaction, Mr. Fernandez, Mr. Dungan and Mr. Ramirez remain the beneficial owners of 11.8%, 4.9% and 0.9% shares, respectively, of the outstanding common stock.  Following the transaction, approximately $3.1 million remained available under the Company’s share repurchase program. One of the primary reasons for this transaction was to lower the Company’s weighted average shares outstanding which had increased by 11% from the first quarter of 2015 as a result of the vesting of the stock appreciation rights (“SARs”) and appreciation in share price. The repurchase reduces weighted average shares outstanding by approximately 4% and is $0.03 to $0.04 accretive on an annualized basis. Based on the most

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recent SEC filings, including shares of Company common stock beneficially owned and shares that could be acquired upon the exercise of the SARs, Mr. Fernandez continues to be the single largest beneficial shareholder of the Company.

In reviewing and approving the transaction, the independent directors of the Board considered, among other factors, the benefits to the Company’s stockholders of this transaction such as the fact that (i) the share repurchase transaction is expected to be accretive to earnings per share, and (ii) the transaction was a unique opportunity to repurchase a large block of shares in an orderly manner. The transaction will be funded from borrowings under the Company’s Credit Facility which was amended on May 9, 2016 in order to provide an additional $25.0 million in borrowing capacity for an aggregate amount of up to $45.0 million from time to time pursuant to a revolving line of credit. There were no amounts outstanding under the Credit Facility prior to the repurchase described above.

Dividend Program

In 2015, the Company increased the annual dividend from $0.12 per share to $0.20 per share to be paid on a semi-annual basis which resulted in aggregate dividends of $3.1 million and $3.2 million paid to shareholders on record on June 29, 2015 and December 28, 2015, respectively. These dividends were paid from U.S. domestic sources and are accounted for as an increase to retained deficit. The dividend declared in December 2015 was paid in January 2016. During the quarter ended April 1, 2016, the Company increased its annual dividend to $0.26 per share to be paid on a semi-annual basis. Subsequent to quarter end, the Board of Directors declared the semi-annual dividend payment of $0.13 for shareholders of record on June 30, 2016 and to be paid on July 11, 2016.



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, 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):

 





As of April 1, 2016 and January 1, 2016, foreign assets included $13.8 million and $14.1 million, respectively, of goodwill related to acquisitions.  



 

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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 Implementation 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 1, 2016. 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 12,000 benchmark studies over 22 years at over 4,300 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 Maintenance 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 specifically exclude non-cash stock compensation expense, intangible asset amortization expense, other one-time acquisition related income and expense,  and assumes a normalized tax rate, which is our long term cash tax rate.    



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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):



Overview.    References to adjusted non-GAAP results specifically exclude non-cash stock compensation expense, intangible asset amortization expense, acquisition related charges and gains, restructuring charges and assumes a normalized 30% cash tax rate.

Our continued strong U.S. demand drove our results as our momentum was realized across virtually all of our U.S. practices.



Revenue. We are a global company with operations located primarily in the United States and Western Europe. Our revenue is denominated in multiple currencies, primarily the U.S. Dollar, British Pound, Euro and Australian Dollar and as a result is affected by currency exchange rate fluctuations. The impact of currency fluctuations was not material to the quarter. In addition, revenue is analyzed based on geographical location of engagement team personnel. 

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Our total Company revenue increased 13%, to $68.8 million in the first quarter of 2016, as compared to $61.0 million in the first quarter of 2015. Our strong results were driven by 20% revenue growth from our North American service offerings.

The Hackett Group total revenue increased 12%, to $57.9 million during the first quarter of 2016, as compared to $51.6 million in the first quarter of 2015. Strong Hackett U.S. growth of 21%, more than offset the decline in our international revenue, primarily in Europe, which decreased 19%, year over year.  

ERP Solutions total revenue increased approximately 16%, to $10.8 million, during the first quarter of 2016, as compared $9.4 million in the first quarter of 2015.

Total Company international revenue accounted for 13% of total Company revenue in the first quarter of 2016, as compared to 18% in the first quarter of 2015.

Reimbursements as a percentage of total revenue were 10% during both the first quarter of 2016 and 2015. In 2016, one customer accounted for more than 5% of our total revenue and in 2014, no customer accounted for more than 5%.

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.  

Adjusted non-GAAP personnel costs increased 14%, or $4.7 million, for the first quarter of 2016,  respectively, as compared to the first quarter of 2015.  The increase in absolute dollar was primarily a result of increased employee headcount and higher subcontractor costs to support increasing revenue and higher incentive compensation accruals commensurate with Company performance.   Adjusted non-GAAP personnel costs before reimbursable expenses, as a percentage of revenue before reimbursements, were 62% for the first quarter of 2016, respectively, as compared to 61% for the first quarter of 2015, respectively. 

Total company adjusted  non-GAAP gross margin was 38% of net revenue in the first quarter of 2016, as compared to 39% for the first quarter of 2015.  

Selling, General and Administrative Costs (SG&A).  Adjusted non-GAAP SG&A costs were $14.2 million for the first quarter of 2016,  as compared to $14.3 million for the first quarter of 2015, respectively.  Adjusted non-GAAP SG&A costs as a percentage of revenue before reimbursements were 23%  for the first quarter of 2016, as compared to 26% for the first quarter of 2015 due to the improved leverage from increased revenue. 

Income Taxes. Our adjusted non-GAAP results utilize a normalized tax rate of 30%, which is our long term cash tax rate.

Under U.S. GAAP, during the first quarter of 2016, we recorded income tax expense of $2.8 million,  which reflected a tax rate of 39%  for certain federal, foreign and state taxes. In the first quarter of 2015, we recorded income tax expense of $1.5 million, which reflected a tax rate of 33% for certain federal, foreign and state taxes. The increase in tax for the first quarter of 2016, as compared to the first quarter of 2015, was primarily the result of the geographical mix of taxable earnings. 

 Liquidity and Capital Resources 

As of April 1, 2016 and January 1, 2016, we had $12.6 million and $23.5 million, respectively, classified in cash and cash equivalents on the consolidated balance sheets.  We currently believe that available funds (including the cash on hand and funds available for 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.



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



Cash Flows from Operating Activities

Net cash provided by operating activities was $0.5 million during the quarter ended April 1, 2016, as compared to cash used by operating activities of $0.3 million during the quarter ended April 1, 2015.   In 2016, the net cash  provided by operating activities was primarily due to net income adjusted for non-cash items and increased accounts payable related to higher vendor accruals,  mostly 

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offset by a  decrease in accrued expenses and other liabilities, primarily as a result of the payout of 2015 incentive compensation, and an increase in accounts receivable and unbilled revenue commensurate with our revenue growth. In 2015,  the net cash utilized by operating activities of $0.3 million was primarily due to increased accounts receivable and unbilled revenue, a decrease in accounts payable and a decrease in accrued expenses and other liabilities, primarily as a result of the payout of 2014 incentive compensation, mostly offset by income adjusted for non-cash items.

Cash Flows from Investing Activities

Net cash used in investing activities was $0.5 million and $0.7 million during the quarters ended April 1, 2016 and April 3, 2015, respectively.  Net cash used in investing activities during the both quarters was primarily due to capital expenditures on the continued development of our benchmark technology.    

Cash Flows from Financing Activities

Net cash used in financing activities was $10.9 million and $2.7 million during the quarters  ended April 1, 2016 and April 3, 2015, respectively. The usage of cash in 2016 was primarily related to the cost of share purchases to satisfy employee net vesting requirements of $3.4 million and the repurchase of $4.3 million of Company stock under the Company’s share repurchase program.  Net cash used from financing activities during 2015 related to the cost of share purchases to satisfy employee net vesting requirements of $2.1 million and the repurchase of $0.6 million of Company stock.

The Company is party to a credit agreement with Bank of America, N.A.  The Credit Agreement provides for a revolving line of credit (the “Revolver”). As of April 1, 2016 and January 1, 2016, we had a remaining capacity under our Revolver of approximately $20.0 million, which was expanded to $45.0 million subsequent to April 1, 2016.  See Note 5, "Credit Facility," to our consolidated financial statements included in this Quarterly Report on Form 10-Q for more information.

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 1, 2016.  

Item  3.Quantitative and Qualitative Disclosures About Market Risk.

As of April 1, 2016, 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 April 1, 2016.  

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



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 Control Over Financial Markets



There were no changes in our internal control 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 control over financial

reporting.



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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 1, 2016.  

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

Issuer Purchases of Equity Securities

During the quarter ended April 1, 2016, the Company repurchased approximately 307 thousand shares of its common stock at an average price of $13.85 per share, for a total cost of approximately $4.3 million, under the repurchase plan approved by the Company's Board of Directors. During the first quarter of 2016, the Board of Directors increased the aggregate size of the plan by $5.0 million, to a total of $100.0 million. As of April 1, 2016, the Company had approximately $3.1 million of authorization under the plan.





Subsequent to April 1, 2016, the Company increased the share repurchase authorization by $22.2 million and repurchased approximately 1.5 million shares of the Company’s common stock from the Company’s CEO, COO and CFO. Following the transaction, $3.1 million remained available under the Company’s share repurchase program. See Note 8 “Shareholders’ Equity” to our consolidated financial statements included in this Quarterly Report on Form 10-Q for more information.

Shares repurchased under the repurchase plan approved by the Company's Board of Directors do not include 255 thousand shares for a cost of $3.4 million that the Company bought back  to satisfy employee net vesting obligations for the quarter April 1, 2016.   







Item  6.Exhibits.

See Index to Exhibits on page 20, 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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