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
, 201
6
. 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
1
2
,000 benchmark studies over 2
2
years at over
4,3
00 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
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.
All below financial measures are in accordance with U.S. GAAP requirements, unless otherwise specified.
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 assume
s
a normalized tax rate
, which is our long term cash tax rate
.
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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July 1,
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July 3,
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July 1,
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July 3,
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2016
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2015
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2016
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2015
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Revenue:
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(unaudited)
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Revenue before reimbursements
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$
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68,178
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100.0%
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$
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59,423
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100.0%
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$
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130,151
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100.0%
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$
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114,328
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100.0%
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Reimbursements
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7,435
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6,972
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14,240
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13,041
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Total revenue
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75,613
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66,395
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144,391
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127,369
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Costs and expenses:
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Cost of service:
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Personnel costs before reimbursable expenses
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41,894
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61.4%
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36,404
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61.3%
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80,245
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61.7%
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70,041
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61.3%
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Non-cash stock compensation expense
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1,136
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1,056
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2,183
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2,091
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Acquisition-related non-cash stock compensation expense
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315
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152
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583
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426
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Reimbursable expenses
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7,435
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6,972
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14,240
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13,041
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Total cost of service
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50,780
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44,584
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97,251
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85,599
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Selling, general and administrative costs
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15,059
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22.1%
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14,675
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24.7%
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29,254
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22.5%
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28,937
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25.3%
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Non-cash stock compensation expense
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861
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540
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1,458
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1,055
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Amortization of intangible assets
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275
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547
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550
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1,094
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Total selling, general, and administrative expenses
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16,195
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15,762
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31,262
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31,086
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Total costs and operating expenses
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66,975
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60,346
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128,513
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116,685
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Income from operations
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8,638
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12.7%
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6,049
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10.2%
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15,878
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12.2%
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10,684
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9.3%
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Other expense:
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Interest income
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—
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—
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—
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2
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Interest expense
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(110)
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(109)
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(151)
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(249)
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Income from operations before income taxes
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8,528
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12.5%
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5,940
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10.0%
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15,727
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12.1%
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10,437
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9.1%
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Income tax expense
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3,082
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4.5%
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2,249
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3.8%
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5,899
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4.5%
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3,741
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3.3%
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Net income
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$
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5,446
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8.0%
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$
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3,691
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6.2%
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$
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9,828
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7.6%
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$
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6,696
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5.9%
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Diluted net income per common share
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$
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0.17
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$
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0.12
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$
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0.30
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$
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0.22
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Adjusted non-GAAP data (unaudited):
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Income from operations before income taxes
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$
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8,528
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$
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5,940
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$
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15,727
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$
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10,437
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Non-cash stock compensation expense
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1,997
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1,596
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3,641
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3,146
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Acquisition-related non-cash stock compensation expense
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315
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152
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583
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426
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Amortization of intangible assets
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275
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547
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550
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1,094
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Adjusted non-GAAP income before income taxes
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11,115
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8,235
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20,501
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15,103
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Adjusted non-GAAP income tax expense
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3,335
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30.0%
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2,471
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30.0%
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6,150
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30.0%
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4,531
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30.0%
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Adjusted non-GAAP net income
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$
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7,781
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$
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5,765
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$
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14,351
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$
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10,572
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Adjusted non-GAAP diluted net income per share
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$
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0.24
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$
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0.19
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$
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0.43
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$
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0.35
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Adjusted non-GAAP gross margin (1)
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26,284
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38.6%
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23,019
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38.7%
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49,906
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38.3%
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44,287
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38.7%
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(1) Adjusted non-GAAP gross margin is revenue before reimbursable expenses less personnel costs before reimbursable expenses.
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Overview.
References to adjusted non-GAAP results specifically exclude non-cash stock compensation expense, intangible asset amortization expense, acquisition related charges and gains
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 and year to date results. In addition, revenue is analyzed based on geographical location of engagement team personnel.
Our total Company revenue increased 14%, to $75.6 million
and 13%, to $144.4 million during the quarter and six months ended July 1, 2016, respectively
, as compared to $66.4 million
and $127.4 million
during the quarter
and six months
ended July
3
, 201
5, respectively
. Our strong results have been driven by 17% and 19% revenue growth from our North American service offerings during the quarter and six months ended July 1, 2016, respectively.
The Hackett Group total revenue increased 17% and 15% during the quarter and six months ended July 1, 2016, respectively, as compared to the quarter and six months ended July 3, 2015. Strong Hackett U.S. growth of 23% and 22% during the quarter and six months ended July 1, 2016, respectively, more than offset the decline in our international revenue, which decreased 4%, or 2% in constant currency, and 12%, or 10% in constant currency, during the same respective periods.
The decrease in international revenue was primarily due to declines in our Asia Pacific operations
,
as our European revenue was essentially flat.
ERP Solutions total revenue decreased 5% during the quarter ended July 1, 2016, but increased 5% during the six months ended July 1, 2016, as compared to the quarter and six months ended July 3, 2015.
Total Company international revenue accounted for 14%
and 13%
of total Company revenue during the quarter and six
months
ended July 1, 2016, respectively, as compared to 1
6
% and 1
7
% during the same respective periods in 2015.
Reimbursements as a percentage of total revenue were 10% during both the quarter and six months ended July 1, 2016, as compared to 11% and 10% for the quarter and six months ended July 3, 2015, respectively. In 2016 and 2015, respectively, no customer accounted for more than 5%
of total revenue
.
Cost of Service.
Cost of service primarily consists of salaries, benefits and incentive compensation for consultants and subcontractor fees; acquisition-related compensation costs; non-cash stock compensation expense; and reimbursable expenses associated with projects.
T
otal cost of service before reimbursable expenses increased 15%, or $5.7 million, and 14%, or $10.5 million during the quarter and six months ended July 1, 2016, respectively, as compared to the quarter and six months ended July 3, 2015.
Adjusted non-GAAP personnel costs increased 15%, or $5.5 million and $10.2 million, during the quarter and six months ended July 1, 2016, respectively, as compared to the quarter and six months ended July 3, 2015. The increase
in both the U.S. GAAP and non-GAAP measures
in absolute dollar was primarily a result of increased employee headcount and higher incentive compensation accruals commensurate with Company performance.
Personnel
costs before reimbursable expenses, as a percentage of revenue before reimbursements, remained flat at 64% during both the quarter and six months ended July 1, 2016, respectively, as compared to 63% for both the quarter and six months ended July 3, 2015.
Adjusted non-GAAP personnel costs before reimbursable expenses, as a percentage of revenue before reimbursements, remained relatively flat at 61% and 62% during the quarter and six months ended July 1, 2016, respectively, as compared to 61% for both the quarter and six months ended July 3, 2015.
Total company adjusted gross margin was 36% of net revenue in during both the quarter and six months ended July 1, 2016, respectively, as compared to 37% during both the quarter and six months ended July 3, 2015.
Total company adjusted non-GAAP gross margin was 39% and 38% of net revenue
during the quarter and six months ended July 1, 2016, respectively, as compared to 39%
during
both the quarter and six months ended July 3, 2015.
Selling, General and Administrative Costs (SG&A)
.
SG&A costs were $16.2 million and $
31.3
million for the quarter and six months ended July 1, 2016, respectively, as compared to $
15.8
million and $31.1 million for the quarter and six months ended July 3, 2015, respectively.
Adjusted non-GAAP SG&A costs were $15.1 million and $29.3 million for the quarter and six months ended July 1, 2016, respectively, as compared to $14.7 million and $28.9 million for the quarter and six months ended July 3, 2015, respectively.
SG&A costs as a percentage of revenue before reimbursements were 24% for both the quarter and six months ended July 1, 2016, as compared to 27% for both the quarter and six months ended July 1, 2015, respectively.
Adjusted non-GAAP SG&A costs as a percentage of revenue before reimbursements were 22% and 23% for the quarter and six months ended July 1, 2016,
respectively,
as compared to 25% for both the quarter and six months ended July 1, 2015
.
The decrease in both of the U.S. GAAP and non-GAAP measures was
due to the improved leverage from increased revenue.
Income Taxes.
D
uring the quarter and six months ended July 1, 2016, we recorded income tax expense of $3.1 million and $5.9 million, respectively, which reflected a tax rate of 36% and 38% for certain federal, foreign and state taxes. In the quarter and six months ended July 3, 2015, we recorded income tax expense of $2.2 million and $3.7 million, respectively, which reflected a tax rate of 38% and 36% for certain federal, foreign and state taxes. The increase in tax for the quarter and six months ended July 1, 2016, as compared to the quarter and six months ended July 3, 2015, was primarily the result of higher taxable income and the geographical mix of taxable earnings.
Our adjusted non-GAAP results utilize a normalized tax rate of 30%, which is our long term cash tax rate.
Liquidity and Capital Resources
As of
July 1
, 2016
and
January
1
, 201
6
, we
had
$
15
.6
million
and $
23.5
million, respectively, classifie
d in cash and cash equivalents o
n 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):
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Six Months Ended
|
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July 1,
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July 3,
|
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2016
|
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2015
|
Cash flows provided by operating activities
|
|
$
|
7,779
|
|
$
|
6,676
|
Cash flows used in investing activities
|
|
$
|
(1,259)
|
|
$
|
(1,593)
|
Cash flows used in financing activities
|
|
$
|
(14,393)
|
|
$
|
(3,160)
|
Cash Flows from Operating Activities
Net cash provided by operating activities was $7.8 million and $6.7 million during the six months ended July 1, 2016 and July 3, 2015, respectively. In 2016, the net cash provided by operating activities was primarily due to net income adjusted for non-cash items, offset by increased accounts receivable and unbilled revenue commensurate with the revenue growth, decreases in accounts payable related to the timing of vendor payments and decreases in accrued liabilities primarily related to payout of 2015 incentive compensation. In 2015, the net cash provided by operating activities was primarily due to net income adjusted for non-cash items, offset by increased accounts receivable and unbilled revenue commensurate with the revenue growth and decreases in accounts payable related to the timing of vendor payments.
Cash Flows from Investing Activities
Net cash used in investing activities was $1.
3
million and $1.6 million during the six months July
1
, 2016 and July
3
, 2015, respectively. Net cash used in investing activities during the
first
six months
in 2016 and 2015,
was primarily due to capital expenditures on the continued development of our benchmark technology and the purchase of computer equipment as a result of the increase in headcount.
Cash Flows from Financing Activities
Net cash used in financing activities was $14.4 million and $3.2 million during the six months ended July 1, 2016 and July 3, 2015, respectively. The usage of cash in 2016 was primarily related to the cost of the repurchase of $29.6 million of Company stock under the Company’s share repurchase program
,
$3.9 million to satisfy employee net vesting-related tax requirements and the
$3.2 million
payout of the dividend declared in 2015. These uses of cash are offset by the net borrowings of $22.0 million. Net cash used from financing activities during 2015 related to the repurchase of $1.3 million of Company stock and the cost of share purchases to satisfy employee net vesting-related tax requirements of $2.2 million.
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 July 1, 2016, we had a remaining capacity under our Revolver of approximately $23.0 million. 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
, 201
6
.