HACKETT GROUP, INC.

10-Q 1 hckt-20150703x10q.htm 10-Q HTML document created with Certent Powered by Crossfire 5.12.132.0 Created on: 8/12/2015 2:32:53 PM 20150703 Q2

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended July 3, 2015

☐ 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)

FLORIDA	65-0750100
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1001 Brickell Bay Drive, Suite 3000 Miami, Florida	33131
(Address of principal executive offices)	(Zip Code)

(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.

Large Accelerated Filer	☐	Accelerated Filer	☒
Non-Accelerated Filer	☐ (Do not check if a smaller reporting company)	Smaller Reporting Company	☐

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 August 7 , 2015 , there were 29, 759,535 shares of common stock outstanding.

The Hackett Group, Inc.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION		Page
Item 1.	Financial Statements
	Consolidated Balance Sheets as of July 3, 2015 (unaudited) and January 2, 2015	3
	Consolidated Statements of Operations for the Quarters and Six Months Ended July 3, 2015 and June 27, 2014	4
	(unaudited)
	Consolidated Statements of Comprehensive Income for the Quarters and Six Months Ended July 3, 2015 and
	June 27, 2014 (unaudited)	5
	Consolidated Statements of Cash Flows for the Six Months Ended July 3, 2015 and June 27, 2014	6
	(unaudited)
	Notes to Consolidated Financial Statements ( unaudited )	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Controls and Procedures	17
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	18
Item 1A.	Risk Factors	18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 6.	Exhibits	18
SIGNATURES		19
INDEX TO EXHIBITS		20

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The Hackett Group, Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	July 3,	January 2,
	2015	2015
ASSETS	(Unaudited)
Current assets:
Cash and cash equivalents	$ 16,217	$ 14,608
Accounts receivable and unbilled revenue, net of allowance of $1,181 and $1,330 at
July 3, 2015 and January 2, 2015, respectively	44,605	37,421
Deferred tax asset, net	2,315	2,828
Prepaid expenses and other current assets	2,489	2,199
Total current assets	65,626	57,056
Property and equipment, net	14,017	13,753
Other assets	5,372	6,548
Goodwill, net	75,374	75,429
Total assets	$ 160,389	$ 152,786
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$ 5,167	$ 7,909
Accrued expenses and other liabilities	35,238	30,901
Current portion of long-term debt	3,321	-
Total current liabilities	43,726	38,810
Long-term deferred tax liability, net	8,821	5,925
Long-term debt	14,942	18,263
Total liabilities	67,489	62,998
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.001 par value, 1,250,000 shares authorized; none issued and outstanding	-	-
Common stock, $.001 par value, 125,000,000 shares authorized; 53,873,318 and 53,203,395
shares issued at July 3, 2015 and January 2, 2015, respectively	54	53
Additional paid-in capital	265,914	264,912
Treasury stock, at cost, 24,138,694 and 23,989,776 shares at July 3, 2015 and January 2, 2015,
respectively	(92,691)	(91,335)
Accumulated deficit	(74,048)	(77,677)
Accumulated comprehensive loss	(6,329)	(6,165)
Total shareholders' equity	92,900	89,788
Total liabilities and shareholders' equity	$ 160,389	$ 152,786

The accompanying notes are an integral part of the consolidated financial statements.

The Hackett Group, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Quarter Ended — July 3,	June 27,	Six Months Ended — July 3,	June 27,
	2015	2014	2015	2014
Revenue:
Revenue before reimbursements ("net revenue")	$ 59,423	$ 55,000	$ 114,328	$ 104,418
Reimbursements	6,972	6,052	13,041	11,539
Total revenue	66,395	61,052	127,369	115,957
Costs and expenses:
Cost of service:
Personnel costs before reimbursable expenses
(includes $1,208 and $999 and $2,517 and $1,685 of stock compensation
expense in the quarters and six months ended July 3, 2015 and
June 27, 2014, respectively)	37,612	35,427	72,558	69,611
Reimbursable expenses	6,972	6,052	13,041	11,539
Total cost of service	44,584	41,479	85,599	81,150
Selling, general and administrative costs
(includes $540 and $691 and $1,055 and $1,344 of stock compensation
expense in the quarters and six months ended July 3, 2015 and
June 27, 2014, respectively)	15,762	15,607	31,086	29,842
Bargain purchase gain from acquisition	—	—	—	(3,015)
Restructuring costs	—	—	—	3,604
Total costs and operating expenses	60,346	57,086	116,685	111,581
Income from operations	6,049	3,966	10,684	4,376
Other income (expense):
Interest income	—	1	2	2
Interest expense	(109)	(166)	(249)	(290)
Income from operations before income taxes	5,940	3,801	10,437	4,088
Income tax expense	2,249	973	3,741	855
Net income	$ 3,691	$ 2,828	$ 6,696	$ 3,233
Basic net income per common share:
Income per common share	$ 0.13	$ 0.10	$ 0.23	$ 0.11
Weighted average common shares outstanding	28,718	28,939	28,635	29,029
Diluted net income per common share:
Income per common share	$ 0.12	$ 0.09	$ 0.22	$ 0.11
Weighted average common and common equivalent shares outstanding	30,888	29,984	30,403	29,926

The accompanying notes are an integral part of the consolidated financial statements.

The Hackett Group, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

	Quarter Ended — July 3,	June 27,	Six Months Ended — July 3,	June 27,
	2015	2014	2015	2014
Net income	$ 3,691	$ 2,828	$ 6,696	$ 3,233
Foreign currency translation adjustment	1,172	106	(164)	485
Total comprehensive income	$ 4,863	$ 2,934	$ 6,532	$ 3,718

The accompanying notes are an integral part of the consolidated financial statements.

The Hackett Group, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six Months Ended — July 3,	June 27,
	2015	2014
Cash flows from operating activities:
Net income	$ 6,696	$ 3,233
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation expense	1,275	1,219
Amortization expense	1,094	1,126
Amortization of debt issuance costs	49	46
Non-cash compensation expense	3,572	3,029
Bargain purchase gain from acquisition	—	(3,015)
Restructuring costs	—	3,604
Provision for doubtful accounts	123	526
Loss on foreign currency translation	416	109
Provision for deferred tax liability	3,409	1,154
Changes in assets and liabilities, net of effects from acquisitions:
Increase in accounts receivable and unbilled revenue	(7,684)	(8,806)
Increase in prepaid expenses and other assets	(244)	(682)
Decrease in accounts payable	(2,742)	(3,059)
Increase (decrease) in accrued expenses and other liabilities	968	(2,028)
Decrease in income tax payable	(256)	(1,162)
Net cash provided by (used in) operating activities	6,676	(4,706)
Cash flows from investing activities:
Purchases of property and equipment	(1,593)	(980)
Cash consideration paid for acquisition	—	(2,700)
Cash acquired in acquisition of business	—	522
Increase in restricted cash	—	(300)
Net cash used in investing activities	(1,593)	(3,458)
Cash flows from financing activities:
Proceeds from issuance of common stock	373	279
Proceeds from borrowings	2,500	10,500
Repayment of borrowings	(2,500)	(37)
Purchases of common stock	(3,533)	(9,995)
Net cash (used in) provided by financing activities	(3,160)	747
Effect of exchange rate on cash	(314)	23
Net increase (decrease) in cash and cash equivalents	1,609	(7,394)
Cash and cash equivalents at beginning of year	14,608	18,199
Cash and cash equivalents at end of period	$ 16,217	$ 10,805
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$ 208	$ 686
Cash paid for interest	$ 203	$ 247
Supplemental disclosure of non-cash investing and financing activities:
Shares issued to Sellers of acquired business	$ —	$ 1,000

The accompanying notes are an integral part of the consolidated financial statements.

The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation and General Information

Basis of Presentation

The accompanying consolidated financial statements of The Hackett Group , Inc. (“Hackett” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“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 theret o 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 result s of operations for the quarter and six months ended July 3, 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 c ash equivalents, accounts receivable and unbilled revenue, accounts payable, accrued expenses and other liabilities and debt. As of July 3, 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 beginni ng 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 . E arly 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.

The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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.

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:

	Quarter Ended — July 3,	June 27,	Six Months Ended — July 3,	June 27,
	2015	2014	2015	2014
Basic weighted average common shares outstanding	28,717,622	28,939,096	28,634,644	29,029,300
Effect of dilutive securities:
Unvested restricted stock units and common stock subject to
vesting requirements issued to employees and non-employees	1,490,490	1,035,202	1,169,221	887,477
Common stock issuable upon the exercise of stock options	680,378	9,496	599,039	9,471
Dilutive weighted average common shares outstanding	30,888,490	29,983,794	30,402,904	29,926,248

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 July 3, 2015 and June 27, 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):

	July 3,	January 2,
	2015	2015
Accounts receivable	$ 35,671	$ 28,154
Unbilled revenue	10,115	10,597
Allowance for doubtful accounts	(1,181)	(1,330)
Accounts receivable and unbilled revenue, net	$ 44,605	$ 37,421

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.

The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

4. Accrued Expenses and Other Liabilities

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

	2015	2015
Accrued compensation and benefits	$ 5,257	$ 3,266
Accrued bonuses	5,189	7,682
Accrued restructuring related expenses	-	270
Accrued dividend payable	3,067	-
Deferred revenue	10,492	8,896
Accrued sales, use, franchise and VAT tax	2,151	1,977
Accrued Technolab earn - out liability	3,440	3,440
Other accrued expenses	5,642	5,370
Total accrued expenses and other liabilities	$ 35,238	$ 30,901

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):


	Employee Costs
Accrual balance at January 2, 2015	$ 270
Expenditures	(270)
Accrual balance at July 3, 2015	$ -

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 B ank 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 "Cred it Agreement") with Bank of America to finance a tender offer for shares of its common stock completed in Octo ber 2013. The Credit Agreement was amended and restated to :

· P rovide for up to an additional $17 .0 million of borrowing under the Term Loan (the "Amended Term Loan" and together with the Revolver, the "Credit Facility") . As of July 3, 2015 , the Company had $ 18.3 million principal amount outstanding on the Amended Term L oan and no outs tanding balance on the Revolver.

· E xtend 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.

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 ).

The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

6. Credit Facility (continued)

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 July 3, 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 payment s 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 $ 1.7 m illion was recorded in the second quarter and first six months of 2014 , respectively . The $3.4 million cash portion of the earn-out was paid out subsequent to quarter end. The stock portion of the earn-out is being recorded as compensation expense over the service vesting period.

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 six months ended July 3, 2015 , the Company issued 693,612 restricted stock units at a weighted average grant-date fair value of $ 8.13 per share. As of July 3, 2015 , the Company had 2, 189,972 restricted stock units outstanding at a weighted average grant-date fair value of $ 6. 60 per share. As of July 3, 2015 , $ 9.2 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 . 2 years.

During the six months ended July 3, 2015 , there were no shares of common stock subject to vesting requirements granted . As of July 3, 2015 , the Company had 264 ,474 shares of common stock subject to vesting requirements outstanding at a weighted average grant-date fair value of $ 7.5 4 per share. As of July 3, 2015 , $ 1. 2 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. 5 year s .

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 th e 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 .

The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 restricti ons. During t he quarter ended July 3, 2015 , the Company repurchase d approximately 7 4 thousand shares of its common stock at an average price of $ 9.51 per share for a total cost of approximately $ 0 . 7 million . During the six months ended July 3, 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. As of July 3, 2015 , the Company had approximately $ 2.3 million available under its share repurchase plan authorization.

During the quarter ended June 27, 2014 , the Company repurchased approximately 491 thousand shares of its common stock at an average price of $ 6.0 3 per share for a total cost of approximately $ 3.0 million. During the six months ended June 27, 2014, the Company repurchased approximately 1.2 million shares of its common stock at an average price of $6.04 per share for a total cost of approximately $7.3 million.

Dividend Program

Subsequent to July 3, 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.

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 count ry of the contracting entity and differs from the Company’s non-GAAP reporting , was attributed to the following geographical areas (in thousands):

	Quarter Ended		Six Months Ended
	July 3,	June 27,	July 3,	June 27,
	2015	2014	2015	2014
Revenue:
North America	$ 55,255	$ 49,215	$ 103,965	$ 94,703
International (primarily European countries)	11,140	11,837	23,404	21,254
Total revenue	$ 66,395	$ 61,052	$ 127,369	$ 115,957

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

	July 3,	January 2,
	2015	2015
Long-lived assets:
North America	$ 79,321	$ 80,152
International (primarily European countries)	15,442	15,578
Total long-lived assets	$ 94,763	$ 95,730

As of July 3, 2015 and January 2, 2015, f oreign assets included $ 1 4. 9 million and $15.0 million, respectively, of goodw ill r elated to the REL and Archstone acquisitions .

The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

11. Geographic and Group Information (continued)

In the following table, t he Hackett Group servic e group encompasses Benchmark ing , 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):

	Quarter Ended — July 3,	June 27,	Six Months Ended — July 3,	June 27,
	2015	2014	2015	2014
The Hackett Group	$ 55,991	$ 49,151	$ 107,583	$ 95,284
ERP Solutions	10,404	11,901	19,786	20,673
Total revenue	$ 66,395	$ 61,052	$ 127,369	$ 115,957

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 Transfo rmation, Executive Advisory, E nterprise P erformance M anagement ("EPM") and EPM Application Maintenance and Support ("AMS") groups . “ERP Solutions” encompasses our SAP ERP Technolo gy and SAP M aintenance 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.

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):

	Quarter Ended — July 3,		June 27,		Six Months Ended — July 3,		June 27,
	2015		2014		2015		2014
Revenue:
Revenue before reimbursements ("net revenue")	$ 59,423	100.0%	$ 55,000	100.0%	$ 114,328	100.0%	$ 104,418	100.0%
Reimbursements	6,972		6,052		13,041		11,539
Total revenue	66,395		61,052		127,369		115,957
Costs and expenses:
Cost of service:
Personnel costs before reimbursable
expenses	36,404	61.3%	33,568	61.0%	70,041	61.3%	66,206	63.4%
Non-cash stock compensation expense	1,056		723		2,091		1,338
Acquisition-related non-cash stock compensation expense	152		276		426		347
Acquisition cash consideration reflected
as compensation expense	—		860		—		1,720
Reimbursable expenses	6,972		6,052		13,041		11,539
Total cost of service	44,584		41,479		85,599		81,150
Selling, general and administrative costs	14,675	24.7%	14,341	26.1%	28,937	25.3%	27,252	26.1%
Non-cash stock compensation expense	540		691		1,055		1,344
Acquisition-related costs	—		—		—		120
Amortization of intangible assets	547		575		1,094		1,126
Total selling, general, and administrative expenses	15,762		15,607		31,086		29,842
Bargain purchase gain from acquisition	—		—		—		(3,015)
Restructuring expense	—		—		—		3,604
Total costs and operating expenses	60,346		57,086		116,685		111,581
Income from operations	6,049	10.2%	3,966	7.2%	10,684	9.3%	4,376	4.2%
Other income (expense):
Interest income	—		1		2		2
Interest expense	(109)	-0.2%	(166)	-0.3%	(249)	-0.2%	(290)	-0.3%
Income from operations before income taxes	5,940	10.0%	3,801	6.9%	10,437	9.1%	4,088	3.9%
Income tax expense	2,249	3.8%	973	1.8%	3,741	3.3%	855	0.8%
Net income	$ 3,691	6.2%	$ 2,828	5.1%	$ 6,696	5.9%	$ 3,233	3.1%
Diluted net income per common share	$ 0.12		$ 0.09		$ 0.22		$ 0.11
Adjusted non-GAAP data (unaudited):
Income from operations before income taxes	$ 5,940		$ 3,801		$ 10,437		$ 4,088
Bargain purchase gain from acquisition	—		—		—		(3,015)
Non-cash stock compensation expense	1,596		1,414		3,146		2,682
Acquisition-related non-cash stock compensation expense	152		276		426		347
Acquisition-related cash compensation expense	—		860		—		1,720
Acquisition-related costs	—		—		—		120
Restructuring costs	—		—		—		3,604
Amortization of intangible assets	547		575		1,094		1,126
Adjusted non-GAAP income before income taxes	8,235		6,926		15,103		10,672
Adjusted non-GAAP income tax expense	2,471	30.0%	2,216	32.0%	4,531	30.0%	3,639	34.1%
Adjusted non-GAAP net income	$ 5,765		$ 4,710		$ 10,572		$ 7,033
Adjusted non-GAAP diluted net income per share	$ 0.19		$ 0.16		$ 0.35		$ 0.24
Adjusted non-GAAP gross margin (1)	23,019	38.7%	21,432	39.0%	44,287	38.7%	38,212	36.6%
(1) Adjusted non-GAAP gross margin is revenue before reimbursable expenses less personnel costs before reimbursable expenses.

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 , E uro 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, r evenue is analyzed based on geographical location of engagement team personnel.

Total Co mpany revenue increased 9 % , or 11 % when adjusting for constant currency, to $66.4 million during the quarter ended July 3, 2015 , as compared to $61.1 million during the quarter ended June 27, 2014 . Total Company revenue increased 10 %, or 13 % when adjusting for constant currency, to $127.4 million during the six months ended July 3, 2015 , as compared to $116.0 million during the six months ended June 27, 2014.

The Hackett Group U.S . revenue in creased 15 % and 14 % during the quarter and six months ended July 3, 2015 , respectively, as compared to the quarter and six months ended June 27, 2014 . The Hackett Group’s i nte rnational revenue increased 9 % during both the quarter and six months ended July 3, 2015 , respectively, as compared to the quarter and six months ended June 27, 2014 . The Hackett Group’s international revenue accounted for 16 % , or 18 % in constant currency, of total Company revenue for both the q uarter s ended July 3, 2015 and June 27, 2014 . The Hackett Group’s international revenue accounted for 17 % , or 19 % in constant currency , of total Company revenue for both the six months ended July 3, 2015 and June 27, 2014.

ERP S olutions revenue decreased 13 % and 4% for the quarter and six months ended July 3, 2015 , as compared to the quarter and six months ended June 27, 2014 . This decrease is mainly due to a significant software sale transaction during the quarter ended June 27, 2014. Assuming a normalized software sales , ERP Solutions revenue grew 13 % and 8 % for the quarter and six months ended July 3, 2015, respectively, as compared to the quarter and six months ended June 27, 2014.

During the quarter and six months ended July 3, 2015 and the six months ended June 27, 2014 , no cu stomer accounted for more than 5 % of total Company revenue. O ne customer accounted for 5% of total Company revenue during the second quarter of 2014.

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

Personnel costs before rei mbursable expenses incre ased 8 %, or $2.8 million , and 6%, or $3.8 million for the quarter and six months ended July 3, 2015 , respectively, as compared to the quarter and six months ended June 27, 2014 . T his increase primarily reflected higher subcontractor costs and higher incentive compensation commensurate with Company performance . Total personnel costs before reimbursable expenses , as a percentage of revenue before reimbursements, were 61 % for both the quarter and six months ended July 3, 2015 , as compared to 61 % and 63% for the quarter and six months ended June 27, 2014 , respectively . The de crease during the six months ended July 3, 2015 , as compared to June 27, 2014 , was primarily due to the improved leverage from increased revenue s, as well as resourcing model actions taken over the last twelve months.

Total company adjusted non-GAAP gross margin was 38.7% of net revenue in the quarter ended July 3, 2015, as compared to 39.0% for the quarter ended June 27, 2014. Total Company adjusted non-GAAP gross margin was 38.7% of net revenue for the six months ended July 3, 2015, as compared to 36.6% for the six months ended June 27, 2014. In the second quarter of 2014, we had a significant software sale transaction in our ERP Solutions groups. Assuming normalized software sales in 2014, the 2014 gross margins would have been 35.7% and 34.8% for the quarter and six months ended June 27, 2014, respectively. The comparison to this normalized gross margin better reflects the margin improvements achieved over the last 12 months, tempered by the increased use of sub-contractors due to increased demand .

Selling, General and Administrative Costs . Selling, general and administrative costs were $ 1 4.7 million and $28.9 million for the quarter and six months ended July 3, 2015 , as compared to $ 14.3 million and $27.2 million for the quarter and six months ended June 27, 2014 . The increase for the six months comparison is primarily due to higher selling-related expenses and incentive compensation accruals commensurate with Company performance. Selling, general and administrative costs as a percentage of revenue before rei mbursements were 25 % for both the q uarter and six months ended July 3, 2015 , as compared to 26% for both the quarter and six months ended June 27, 2014 due to the improved leverage from increased revenue.

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 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.

Subsequent to quarter end, the cash portion of the earn-out of $3.4 million was paid out.

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 actio ns were taken as a result of our continued volatility in demand in our Europe an markets .

Income Taxes. In the quarter and six months ended July 3, 2015 , we rec orded income tax expens e of $ 2.2 million and $3.7 million, respectively, wh ich reflected a tax rate of 3 8 % and 36%, respectively, for certain federal, foreign and state taxes. In the quarter and six months ended June 27, 2014 , we rec orded income tax expense of $1.0 million and $0.9 million, respectively, which reflected a tax rate of 26 % and 21%, respectively, for certain federal, foreign and state taxes . The increase in tax for the quarter and six months ended July 3, 2015 , as compared to the quarter and six months ended June 27, 2014 , was primarily due to higher taxable income in 2015 as a result of growth in Company performance and non-recurring restructuring costs taken in 2014 , as discussed above .

Liquidity and Capital Resources

As of July 3, 2015 and January 2, 2015 , we had $ 16.2 million and $ 14.6 million, respectively, classifie d in cash and cash equivalents o n the consolidated balance sheets.

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

	Six Months Ended — July 3,	June 27,
	2015	2014
Cash flows provided by (used in) operating activities	$ 6,676	$ (4,706)
Cash flows used in investing activities	$ (1,593)	$ (3,458)
Cash flows (used in) provided by financing activities	$ (3,160)	$ 747

Cash Flows from Operating Activities

Net cash provided by operating activities was $ 6.7 million during the six months ended July 3, 2015 , as compared to net cash used by operating activities of $ 4.7 million during the six months ended June 27, 2014 . In 2015, the net cas h provided was primarily due to an increase in net income adjusted for non-cash items, partially offset by higher accounts receivable and unbilled revenue due to increased revenue. In 2014, t he utilization of cash was primarily due to an increase in accounts receivable and unbilled balances , partially offset by net income adjusted for non-cash items.

Cash Flows from Investing Activities

Net cash used in investing ac tivities was $ 1.6 million and $ 3.5 million during the six months ended July 3, 2015 and June 27, 2014 , respectively. Net cash used in investing activities d uring the six months ended July 3, 2015 was due to capital expenditures primarily for the continued development of b enchmark technology . Net c ash used in investing activities during the six months ended June 27, 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 from financing activities was $ 3.1 million during the six months ended July 3, 2015 . The net cash used from financing activities during the six months ended July 3, 2015 was primarily due to the repurchase of $ 1. 3 million of Company stock and the cost of share purchases to satisfy employee net vesting requirements of $2.2 million . Net cash provided from financing activities was $ 0.7 million during the six months ended June 27, 2014 , which 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 milli on of Company stock and the cost of share purchases to satisfy employee net vesting requirements of $2.7 million.

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 July 3, 2015, the Company had $18.3 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.

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 July 3, 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 July 3, 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.

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal 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 material ly affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

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 .

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

Issuer Purchases of Equity Securities

During the quarter ended July 3, 2015 , the Company repurchased approximately 74 thousand shares of its common stock at an average price of $ 9.51 per share , for a total cost of approximately $ 0.7 million , under the repurchase plan approved by the Company's Boar d of Directors. As of July 3, 2015 , the Company had approximately $ 2.3 million of authorization under the plan.

			Total Number — of Shares as Part	Value That May
			of Publicly	Yet be Purchased
	Total Number	Average Price	Announced	Under the
Period	of Shares	Paid per Share	Program	Program
Balance as of April 3, 2015				$ 3,011,796
April 3, 2015 to May 1, 2015	1,718	$ 9.75	1,718	$ 2,995,048
May 2, 2015 to May 29, 2015	72,141	$ 9.51	72,141	$ 2,309,345
May 30, 2015 to July 3, 2015	-	$ -	-	$ 2,309,345
	73,859	$ 9.51	73,859

Shares repurchased in the table above do not include 9 thousand share s for a cost of $0.1 milli on and 276 thousand shares for cost of $2.2 million, that the Company bought back t o satisfy employe e net vesting obligations for the quarter and six months ended July 3, 2015, respectively.

Item 6. Exhibits.

See Index to Exhibits on page 20 , which is incorporated herein by reference.

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.

	The Hackett Group, Inc.
Date: August 12 , 2015	/s/ Robert A. Ramirez
	Robert A. Ramirez
	Executive Vice President, Finance and Chief Financial Officer

INDEX TO EXHIBITS

Exhibit No.	Exhibit Description
31.1	Certification by CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (exhibits filed herewith).
31.2	Certification by CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (exhibits filed herewith).
32	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (exhibits filed herewith).
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

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