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 December 2
7
, 201
3
. 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 proprietary Hackett benchmarking database, the world’s leading repository of enterprise business process performance metrics and best practice intellectual capital, our business and technology solutions help clients optimize performance and returns on business transformation investments.
Only Hackett empirically defines world-class performance in sales, general and administrative and supply chain activities with analysis gained through more than
10,000 benchmark studies over 21
years at over 3,500 of the world’s leading companies.
In the following discussion, “The Hackett Group” encompasses our Benchmarking, Business Transfo
rmation, Executive Advisory,
E
nterprise
P
erformance
M
anagement
("EPM")
groups
and Technolab Application Maintenance and Support ("AMS").
“ERP
Solutions” encompasses our
SAP
ERP Technolo
gy
and SAP maintenance
groups
.
During the quarter ended
March 29
, 2013
, we exited the Oracle ERP implementation business
. The transaction was not material to our
consolidated
financial statements, however, the following information has been recast to exclude activity related to the business.
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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Quarter Ended
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Six Months Ended
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June 27,
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June 28,
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June 27,
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June 28,
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2014
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2013
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2014
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2013
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Revenue:
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Revenue before reimbursements
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$
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55,000
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100.0%
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$
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52,341
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100.0%
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$
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104,418
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100.0%
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$
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101,212
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100.0%
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Reimbursements
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6,052
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6,620
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11,539
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12,098
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Total revenue
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61,052
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58,961
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115,957
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113,310
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Costs and expenses:
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Cost of service:
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Personnel costs before reimbursable
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expenses
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34,353
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62.5%
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33,363
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63.7%
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67,606
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64.7%
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65,405
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64.6%
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Reimbursable expenses
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6,052
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6,620
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11,539
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12,098
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Total cost of service
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40,405
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39,983
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79,145
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77,503
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Selling, general and administrative costs
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15,621
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28.4%
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13,893
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26.6%
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29,862
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28.6%
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27,193
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26.9%
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Restructuring expense
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—
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—
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3,604
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3.5%
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—
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Total costs and operating expenses
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56,026
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53,876
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112,611
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104,696
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Income from operations
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5,026
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9.1%
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5,085
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9.7%
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3,346
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3.2%
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8,614
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8.5%
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Other expense:
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Interest expense, net
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(165)
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-0.3%
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(122)
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-0.2%
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(288)
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-0.2%
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(263)
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-0.2%
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Income from continuing operations before income taxes
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4,861
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8.8%
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4,963
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9.5%
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3,058
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3.0%
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8,351
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8.3%
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Income tax expense
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1,386
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2.5%
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2,033
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3.9%
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1,629
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1.6%
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3,392
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3.4%
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Income from continuing operations
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3,475
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6.3%
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2,930
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5.6%
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1,429
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1.4%
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4,959
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4.9%
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Loss from discontinued operations
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—
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—
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—
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(71)
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Net income
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$
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3,475
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6.3%
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$
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2,930
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5.6%
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$
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1,429
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1.4%
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$
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4,888
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4.8%
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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.
Our results
for
the quarters
and six months
ended
June 27, 2014
and
June 28, 2013
, were not materially impacted by foreign currency
exchange
rate fluctuations.
Total Co
mpany revenue increased
4%
and 2%
during the quarter
and six months
ended
June 27, 2014
, respectively
,
as compared to the quarter
and six months
ended
June 28, 2013
. The following table summarizes revenue (in thousands):
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Quarter Ended
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Six Months Ended
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June 27,
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June 28,
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June 27,
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June 28,
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2014
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2013
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2014
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2013
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The Hackett Group
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$
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49,151
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$
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47,659
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$
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95,284
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$
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91,271
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ERP Solutions
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11,901
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11,302
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20,673
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22,039
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Total revenue
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$
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61,052
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$
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58,961
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$
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115,957
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$
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113,310
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Although
The Hackett Group U.S
revenue increased
3
% and
11
%
during the
quarter and
six months
ended
June 27, 2014
,
respectively,
as compared to the
quarter and
six months
ended
June 28, 2013
, this growth was offset by
a decrease
of international revenue
of
5% and
13
%
during the same period
.
The increase in The Hackett Group's
U.S.
revenue
primarily related to the increased demand in the
Business Transformation and
EPM groups
, as well as revenue from the Technolab acquisition
.
The Hackett Group’s international revenue, which is primarily based on the country of the contracting entity, accounted for
19
% and 18
%
of total Company
revenue for the quarter
and six months
ended
June 27, 2014
and
21% and
22
% of total Company revenue for the quarter
and six months
e
nded
June 28, 2013
, respectively.
ERP S
olutions revenue in
creased
5
%
for the quarter ended
June 27, 2014
, as compared to the quarter ended
June 28, 2013
.
T
his revenue
in
crease reflected
a higher than expected growth
in
SAP license sales
during the quarter ended
June 27, 2014
.
ERP Solutions revenue decreased 6% for the six months ended June 27, 2014, as compared
to the six months ended June
28, 2013
, which reflected
transitional
movement in the SAP sales channel
over the past 12 months
.
During the quarter
ended June 27, 2014, one customer accounted for 5% of total Company revenue. During the six months ended
June 27, 2014
and
the quarter and six months ended
June 28, 2013
, no cu
stomer 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, subcontractor fees and reimbursable expenses associated with projects. Cost of service before rei
mbursable expenses increased 3%, or $1.0 million
,
and $2.2 million, or 3%,
for the quar
ter
and six months
ended
June 27, 2014
, respectively
, as compared to the quarter
and six months
ended
June 28, 2013
. Total cost of service before reimbursable expenses, as a percentage of revenue before
reimbursements,
was
63
%
and
65%
for
the qua
rter
and six months
ended
June 27, 2014
, as compared to 64
%
and 65%
for the quarter
and six months
ended
June 28, 2013
, respectively
.
The de
crease
during the quarter
ended June 27, 2014, as compared to June 28, 2013,
was primarily due to
the leverage from
increased revenue
and lower subcontractor costs
.
As a percentage of revenue before reimbursements, The Hackett G
roup gen
erated net margins of 32
%
and 31%
in
the
quarter
and six months
ended
June 27, 2014
,
respectively,
which were unfa
vorably impacted by
the continued decline in demand in our European markets
. As a percentage of revenue before reimbursements, ERP Solut
ions generated net margins
of 47
%
and 39%
for
the quarter
and six months
ended
June 27, 2014
, respectively, primarily driven by SAP license sales during the quarter ended June 27, 2014.
Selling, General and Administrative
. Selling, general and
administrative costs were $
15.6
million
and $29.9 million
for the quarter
and six months
ended
June 27, 2014
, respectively
,
as compared to $
13.9
million
and $27.2 million
for the quarter
and six months
ended
June 28, 2013
, respectively
. Selling, general and administrative costs as a percentage of revenue before rei
mbursements increased to 28
%
and 29%
for
the quarter
and six months
ended
June 27, 2014
, respectively
, as compared to 27
% for
both
the quarter
and six months
ended
June 28, 2013
.
The increase in selling, general and administrative costs was primarily due to
the
incremental
administrative
costs
resulting from the
Technolab acquisition,
an increase in amortization related to the
intangible assets acquired in
the Technolab acquisition
and higher selling costs commensurate with the increase in revenue
.
Restructuring Costs.
During the
six months
ended
June 27
, 2014
, we
recorded restructuring costs of $3.6 million,
primarily
for reductions in consultants and functional support personnel
in Europe
. These actio
ns were taken as a result of our
continued decline in
demand in our
Europe
an markets
.
We
effected these changes to reduce our costs to better align our
overall cost structure and organization
with anticipated demand for our
services.
Income Taxes.
In the quarter and six months ended June 27, 2014, we recorded income tax expense of $1.4 million and $1.6 million, respectively, which reflected a tax rate of 28.5% and 53.3% for certain federal, foreign and state taxes. In the quarter and six months ended June 28, 2013, we recorded income tax expense of $2.0 million and $3.4 million, respectively, which reflected a tax rate of 41.0% and 40.6% for certain federal, foreign and state taxes. The decrease in the tax rate for the quarter ended June 27, 2014, as compared to June 28, 2013, was primarily the result of a more favorable geographical mix of taxable earnings. The increase in the tax rate for the six months ended June 27, 2014, as compared to June 28, 2013, was primarily due to higher taxable earnings in the U.S. as a percentage of total earnings due to the European restructuring costs incurred in 2014.
Liquidity and Capital Resources
As of
June 27, 2014
and December 27, 2013
, we had $
10.8
million and $
18.2
million, respectively, classifie
d in cash and cash equivalents o
n the consolidated balance sheets. As of the same dates, we had $
0.7
mil
lion and $0.4
million on deposit with financial institutions that primarily related to certain employee compensation agreements
and
funds
held in escrow related to the Technolab acquisition
. These deposit accounts have been classified as restricted cash on the consolidated balance sheets.
The following table summarizes our
cash flow activity (in thousands):
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Six Months Ended
|
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June 27,
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June 28,
|
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|
2014
|
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|
2013
|
Cash flows (used in) provided by operating activities
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|
$
|
(7,377)
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|
$
|
5,173
|
Cash flows used in investing activities
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|
$
|
(3,458)
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|
$
|
(1,059)
|
Cash flows provided by (used in) financing activities
|
|
$
|
3,418
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|
$
|
(10,210)
|
Cash Flows from Operating Activities
Net cash
used in
operating activities was $
7.4
million
during the six months ended June 27, 2014, as
compared to net cash provided by operating activities
of $5.2 million during the six months ended June 28, 2013.
Excluding the noncash impact of the assets and liabilities acquired in the Technolab acquisition
,
t
he
increased use of cash
primarily related to increased accounts receivable and unbilled balances
, and the
timing of vendor and
performance bonus
.
Cash Flows from Investing Activities
Net cash used
in investing ac
tivities was $
3.5
million and $
1.1
million
during the
six
months ended
June 27, 2014
and
June 28, 2013
, respectively.
The
usage of cash
during the quarter ended
June 27, 2014
, was
primarily related to
the cash consideration paid for the Technolab acquisition, partially offset by cash acquired in the acquisition. In addition, cash was utilized during both periods on
capital expenditures for the development of the Hackett Performance Exchange.
Cash Flows from Financing Activities
On October 15, 2013, we completed a tender offer to purchase
approximately
1.0
million shares of our common st
ock at a purchase price of $7.00
per share, for an agg
regate cost of approximately $6.9
million, excluding fees and expenses related to the tender offer.
On March 21, 2012, we completed a tender offer to purchase 11.0 million shares of our common stock at a purchase price of $5.00 per share, for an aggregate cost of approximately $55.0 million, excluding fees and expenses related to the tender offer.
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 offe
r for its shares in March 2012. S
ee
Note 6
to the consolidated financial statements
for further information
.
On August 27, 2013, the Company amended and restated the credit agreement (the "Credit Agreement") with Bank of America to
provide for up to
an additional $17
.0 million of borrowing availability under the Term Loan (the "Amended Term Loan" and together with the Revolver, the "Credit Facility") and extend the maturity date on the Revolver and the
Amended
Term Loan to August 27, 2018, five years from the date of the
amendment and restatement of the
Credit Agreement.
Additional borrowings
of $7.0 million
under the Amended Term Loan were used to finance our tender o
ffer in October 2013. S
ee
Note 6
to the consolidated financial statements
for further information
.
As of
June 27, 2014
, the Company had $2
5.0
million principal amount outstanding under the Amended Term Loan and $4.5 million outstanding under the Revolver.
Net cash
provided by
financing activities was $
3.4
million
during the
six months
ended
June 27, 2014
, as compared to net cash used from financing activities of $10.2 million
during the six months ended June 28, 2013
. This increase in cash was primarily due to $
10
.5 million of borrowings under our Credit Facility and proceeds from the sale of the Company stock
, partially offset by
the
repurchase
of $
7.3
million of
Company stock. Net cash used by financing activities during the
six months
ended
June 28, 2013
,
primarily
related
to the repayment of borrowings outstanding under the Credit Facility of $
10.0
million, partially offset by the proceeds from the sale of Company stock.
We currently believe that available funds (including the cash on hand and
$15.5
million in
funds available for borrowing 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 December 2
7, 2013
.