ITEM 1. BUSINESS
GENERAL
On January 1, 2008, we changed our corporate name from Answerthink, Inc. (“Answerthink”) to The Hackett Group, Inc. (“Hackett”). We were originally incorporated on April 23, 1997. All prior references to Answerthink will now be reflected as Hackett as if the name change was effected for all years presented. Hackett is a global strategic advisory firm and a leader in best practice advisory, benchmarking, and transformation consulting services, including shared services, offshoring and outsourcing advice. Utilizing best practices and implementation insights from more than 4,000 benchmarking engagements, executives use Hackett’s empirically based approach to quickly define and prioritize initiatives to enable world-class performance. Through its REL brand, Hackett offers working capital solutions focused on delivering significant cash flow improvements. Through its Hackett Technology Solutions group (“HTS”). Hackett offers business application consulting services that help maximize returns on information technology (“IT”) investments. Hackett has worked with 2,700 major corporations and government agencies, including 97% of the Dow Jones Industrials, 73% of the Fortune 100, 73% of the DAX and 50% of the FTSE 100.
In this Form 10-K, unless the context otherwise requires, “Hackett,” the “Company,” “we,” “us,” and “our” refer to The Hackett Group, Inc. and its subsidiaries and predecessors.
Heading into 2009, it is clear that we will face a more challenging economic environment. We believe that our offerings are well aligned with the pressure that all organizations currently face to reduce costs and optimize cash balances. The question is whether organizations can make the changes themselves or whether they will turn to other organizations for assistance. The key for us is to continue to ensure that our clients understand that our unique intellectual capital and implementation expertise will enable them to make the necessary changes in a targeted and timely manner.
Specifically, organizations must ensure that their underlying business processes are allowing them to efficiently support their operations and achieve their financial targets in an increasingly difficult economic environment. To do so, organizations will have to understand and decide how best to organize, enable, source and manage their critical business processes. We believe companies will continue to place increased emphasis on risk management and tangible return on their business and technological investments. We believe large enterprises will continue to focus their performance improvement consulting spending on strategies and tools that help them generate more value from their business investments in the form of enhanced productivity and efficiency. We expect companies to continue to look for ways to centralize, standardize and automate business processes by leveraging highly educated, low cost offshore labor markets. In today’s environment, clients must be clearly convinced that you can help them achieve their targeted results in a timely manner.
OUR PROPRIETARY BEST PRACTICE IMPLEMENTATION INTELLECTUAL CAPITAL
Hackett uses its proprietary Best Practice Implementation (“BPI”) intellectual capital to help clients improve their performance. Utilizing the performance metrics and our vast repository of best practices that emanate from over 4,000 benchmark studies, combined with the global implementation insight of our transformation and technology associates, Hackett has created a series of process and technology tools that allow clients to effect proven sustainable performance improvement.
Our BPI approach leverages our inventory of Hackett-Certified™ practices, observed through benchmark and other best practice implementation engagements, to correlate best practices with superior performance levels. We use Hackett intellectual capital in the form of best practice process flows and software configuration guides to integrate Hackett’s empirically proven best practices directly into business processes and workflow that is enabled by enterprise software applications. The repository of best practice process flows and software configuration guides reside in the Best Practice Intelligence Center portal and are used throughout the term of a project to ensure that best practices are identified and implemented. This coordinated approach addresses people, process, information access and technology.
Because Hackett solutions are based on Hackett-Certified™ practices, we believe that clients gain significant advantages. Clients can have confidence that their solutions are based on strategies from the world’s leading companies. More importantly, Hackett solutions deliver enhanced efficiency, improved effectiveness, increased flexibility, optimized return on investment and reduced implementation risk.
The BPI approach often begins with a clear understanding of current performance, which is gained through benchmarking key processes and comparing the results to world-class levels and industry standards captured in the Hackett database. We then help clients prioritize and select the appropriate best practices to implement through a coordinated performance improvement strategy. Without a coordinated strategy that addresses the four key business drivers of people, process, technology and information, we believe companies risk losing a significant portion of business case benefits of their investments. We have designed detailed best practice process flows based on Hackett’s deep knowledge of world-class business performance which enable clients to streamline and automate key processes, and generate performance improvements quickly and efficiently at both the functional and enterprise level.
Similarly, we integrate Hackett-Certified™ practices directly into technology solutions. We believe it is imperative that companies simplify and automate processes to meet best practice standards before new technology implementations and upgrades are completed. The automation of inefficient processes only serves to continue to drive up costs, cycle times and error rates. We have completed detailed fit-gap analyses in most functional areas of major business application packages from Oracle, Hyperion and SAP to determine their ability to support best practices. Application-specific tools, implementation guides and process flows allow us to optimize the configuration of enterprise resource planning (“ERP”) software, while limiting customization. Best practice implementations establish the foundation for improved performance.
We believe the combination of optimized processes, a best practices-based business application and enhanced business intelligence environment allows our clients to achieve and sustain significant business performance improvement. The specific client circumstances normally dictate how they engage us. Our goal is to be responsive to client needs, and to establish a continuous and trusted relationship. We have developed a series of offerings that allow us to efficiently help the client without regard to where they are in their performance improvement lifecycle.
COMPETITION
The strategic business advisory and technology consulting marketplace continues to be extremely competitive. The marketplace will remain competitive as companies continue to look for ways to improve their organizational effectiveness. Our competitors include strategic consulting firms, executive research advisory firms, international and regional management consulting and IT firms, and the IT services divisions of application software firms. Mergers and consolidations throughout our industry have resulted in higher levels of competition. We believe that the principal competitive factors in the industries in which we compete include: skills and capabilities of people, innovative services and product offerings, perceived ability to add value, reputation and client references, price, scope of services, service delivery approaches, technical and industry expertise, quality of services and solutions, ability to deliver results on a timely basis, availability of appropriate resources, and global reach and scale. Very few of our competitors have proprietary intellectual capital similar to the performance metrics and best practice implementation insight that emanates from our Transformational Benchmark offering.
In spite of our size relative to our competitor group, we believe our competitive position is strong. With Hackett best practice intellectual capital and its direct link to our BPI approach, we believe we can uniquely assist our clients. Our ability to apply best practices to client operations via proven techniques is at the core of our competitive standing.
Similarly, we believe that Hackett is the definitive source for best practice performance metrics and strategies. Hackett is the only organization that has conducted over 4,000 benchmark studies for over 2,700 clients, generating proprietary data sets spanning performance metrics and correlating best practices with superior performance. The combination of Hackett benchmark data, along with deep expertise and knowledge in evaluating, designing and implementing business transformation strategies, deliver a powerful and distinct value proposition for our clients.
Our culture of client collaboration leverages the power of our cross-functional and service line teams to increase revenue and strengthen relationships. We believe that this culture, along with our intellectual capital-centric approach, gives us a competitive advantage.
STRATEGY
Moving forward, our focus will be on executing the following strategies:
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Expand our brand or market permission to our other offerings. We believe that our long term growth prospects lie in our ability to extend our unique market permission to help clients measure their performance improvement opportunity, or gap analysis, using our proprietary benchmark database into our other offerings. We have started to extend our permission through the strategic relationship that results from our Executive Advisory Programs. However, our most significant growth opportunity is in our ability to extend our brand and market permission into our transformation and other best practice implementation offerings resulting in exponential revenue per client.
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Continue to position and grow Hackett as an IP-centric strategic advisory organization. The Hackett brand is widely recognized for benchmarking metrics and best practice strategies. By building a series of highly complementary on-site and off-site offerings that allow our clients access to our Intellectual Property (“IP”) which is based on our best practice process and technology implementation insight, we are able to build trusted strategic relationships with our clients. Depending where our clients are in their assessment or implementation of performance improvement initiatives, we offer them a combination of offerings that support their efforts. If they need on-site planning, design and/or implementation support, we offer them a combination of benchmarking and transformation support. If they need off-site access to our IP and advisors to help them either assess or execute on their own, they can avail themselves of our Executive Advisory Programs. The key is for the client to know that we can support them strategically by leveraging our unique IP and insight so that we are able to build a strategic relationship which is appropriate for them. We also believe that clients that value our IP will turn to us for other services when the need arises, allowing us over time to ascribe a larger amount of our total revenue to a growing client base, which will improve the predictability of our results.
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Continue to expand our BPI tools. BPI incorporates intellectual capital from Hackett into our implementation tools and techniques. For clients, the end results are tangible cost, performance gains and improved returns on their investments. Our clients attribute their decision to use us based on our BPI approach and tools. Our objective is to help clients make smarter business process and software configuration decisions as a result of our BPI methods and knowledge. We are continuously updating our BPI content and tools through benchmarking, transformation or research activities. Additional BPI updates are also driven by new software releases that drive new innovation in business process automation.
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Create strategic relationships that help us leverage and expand our Hackett intellectual capital base as well as grow our revenue. We continue to believe that there are other organizations which can help us grow revenue and intellectual capital consistent with our strategy. Such relationships include programs that we have executed with other consulting organizations, industry trade groups and software providers.
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Recruit and develop talent. As we continue to grow and realize the potential of our business model, it has become increasingly evident that the primary limit to our progress will be our ability to attract, retain, develop and motivate associates. In the latter part of 2008, we rolled out a new talent management initiative that included a new performance management program and a new comprehensive personal development training curriculum. Our 2009 plans call for the expansion of these initiatives along with new mentoring and other associate development programs specifically targeted to improve our execution.
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Leverage our dual shore capabilities. Developing an offshore resource capability to support all of our offerings has been a key strategy for our organization. Our facility in Hyderabad, India allows us to increase operational efficiencies while maintaining 24 hour/5 day operations.
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Seek out strategic acquisitions. We will continue to pursue strategic acquisitions that strengthen our ability to compete and expand our IP. We believe that our unique Hackett access and our BPI approach, coupled with our strong balance sheet and infrastructure, can be utilized to support a larger organization. We believe that acquisitions must be accretive or have strong growth prospects, but most importantly, have strong synergy with our best practice intellectual capital focus. For example, our acquisition of REL Consultancy Group Limited (“REL”) in 2005 expanded our knowledge and capabilities into working capital management and expanded our client base and exposure to additional markets abroad.
OUR OFFERINGS
We offer a comprehensive range of services, including executive advisory programs, benchmarking, business transformation and technology consulting services. With strategic and functional knowledge in finance, human resources, information technology procurement, supply chain management, corporate services, customer service and sales and marketing, our expertise extends across the enterprise. We have completed successful engagements in a variety of industries, including automotive, consumer goods, financial services, technology, life sciences, manufacturing, media and entertainment, retail, telecommunications, transportation and utilities.
The Hackett Group
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Executive Advisory Programs
On-demand access provides world-class performance metrics, peer-learning opportunities and best practice implementation advice. The scope of Hackett’s advisory programs is defined by business function (Executive Advisory) and by end-to-end process coverage (Process Advisory). Our advisory programs include a mix of the following deliverables:
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Advisor Inquiry: Hackett’s inquiry services are used by clients for quick access to fact-based advice on proven approaches and methods to increase the efficiency and effectiveness of selling, general and administrative processes (“SG&A”).
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Best Practice Research: Empirically-based research and insight derived from Hackett benchmark and transformation studies. Our research provides detailed insights into the most significant proven approaches in use at world-class organizations that yield superior business results.
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Peer Interaction: Regular member-led webcasts, annual Best Practice Conferences, annual Member Forums, membership performance surveys and client-submitted content provide ongoing peer learning and networking opportunities.
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Best Practice Intelligence Center: Online, searchable repository of best practices, performance metrics, conference presentations and associated research available to Executive Advisory Program Members and their support teams.
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Benchmarking Services
Our benchmarking group dates back to 1991, and has measured and evaluated the efficiency and effectiveness of enterprise functions for over 2,700 global organizations. This includes 97% of the Dow Jones Industrials, 73% of the Fortune 100, 73% of the DAX and 50% of the FTSE 100. Ongoing studies are conducted in a wide range of areas, including SG&A, finance, human resources, information technology, procurement, shared service centers and working capital management. Hackett has identified over 1,400 best practices for over 95 processes in these key functional areas and uses proprietary performance measurement tools and data collection processes that enable companies to complete the performance measurement cycle and identify and quantify improvement opportunities in as little as four weeks. Benchmarks are used by our clients to objectively establish priorities, generate organizational consensus, align compensation to establish performance goals, and develop the required business case for business and technology investments.
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Business Transformation
Our Business Transformation programs help clients develop a coordinated strategy for achieving performance improvements across the enterprise. Our experienced teams utilize Hackett performance measurement data to link performance gains to industry best practices. Our strategic capabilities include operational assessments, process and organization design, change management and the effective application of technology. We combine best practices knowledge with business expertise and broad technology capabilities, which we believe enables our programs to optimize return on client investments in people, process, technology and information.
Through REL, a global leader in generating cash improvement from working capital, we offer services which are designed to help companies improve cash flow from operations through improved working capital management, reduced costs and increased service quality.
Hackett Technology Solutions (“HTS”)
Our HTS professionals help clients choose and deploy the software applications that best meet their needs and objectives. Our expertise is focused on the following application providers: Oracle, PeopleSoft, SAP, Hyperion and several leading time and attendance providers. The group offers comprehensive services from planning, architecture, and vendor evaluation and selection through implementation, customization, testing and integration. Comprehensive fit-gap analyses of all major packages against Hackett Best Practices are utilized by our HTS teams. BPI tools and templates help integrate best practices into business and analytical applications. The group also offers post-implementation support, change management, exception management, process transparency, system documentation and end-user training, all of which are designed to enhance return on investment. We also provide offshore application development and support services. These services include post-implementation support for select business application platforms. Our HTS group also includes a division responsible for the sale and maintenance support of the SAP suite of ERP applications.
CLIENTS
We focus on long-term client relationships with Global 2000 firms and other sophisticated buyers of business and IT consulting services. During 2008 and 2007, our ten most significant clients accounted for approximately 25% of revenue, and no client generated more than 5% of total revenue. We believe that we have achieved a high level of satisfaction across our client base. The responses to our client satisfaction surveys have been positive. We receive surveys from a significant number of our engagements which are utilized in a rigorous process to improve our delivery execution, sales processes, methodologies and training.
BUSINESS DEVELOPMENT, MARKETING AND MARKET SEGMENTATION
Our extensive client base and relationships with Global 2000 firms remain our most significant sources of new business. Our revenue generation strategy is formulated to ensure we are addressing multiple facets of business development. The categories below define our business development resources and market segmentation. Our primary goal in 2008 was to continue to increase awareness of our brand which we have created around Hackett’s empirical knowledge capital and BPI. Our Hackett and BPI message have remained the central focus of our marketing and communications programs in 2008 which helped to expand both an understanding of and demand for this approach. Similarly, we have regionalized our sales and market development efforts in both North America and Europe, so we can better coordinate the sales efforts from the various offerings. In 2008, the compensation programs for our associates reflected an emphasis optimizing our total revenue relationship with our clients while continuing to emphasize the growth of our Executive Advisory Programs. For our HTS groups, we have continued to utilize Hackett intellectual capital that resides in our BPI tools as a way to differentiate the relationships we have with the software providers and with our clients.
BUSINESS DEVELOPMENT RESOURCES
Although virtually all of our advisors and consultants have the ability to and are expected to contribute to new revenue opportunities, our primary internal business development resources are comprised of the following:
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The Leadership Team and Senior Directors are comprised of our senior leaders who have a combination of executive, regional, practice and anchor account responsibilities. In addition to their management responsibilities, this group of associates is responsible for growing the business by fostering executive-level relationships within accounts and leveraging their existing contacts in the marketplace.
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The Sales Organization is comprised of associates who are 100% dedicated to generating sales. They are deployed geographically in key markets and are primarily focused on developing new relationships and are aligned to our core practice areas within their target accounts. They also handle opportunities in their geographic territories as they arise.
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The Business Development Associates are comprised of trained groups of telemarketing specialists who are conversant with their respective solution areas. Lead generation is coordinated with our marketing and sales groups to ensure that our inbound and outbound efforts are synchronized with targeted marketing and sales programs.
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The Delivery Organization is comprised of our billable associates who work at client locations. We encourage associates to pursue additional business development opportunities through their normal course of delivering existing projects and helping us expand our business within existing accounts.
In addition to our business development resources, we have a corporate marketing and communications organization responsible for overseeing our marketing programs, public relations and employee communications activities.
We have segmented our market focus into the following categories:
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Anchor Accounts are comprised of large prospects and existing relationships which we believe will have a significant revenue relationship within the next 18 months. Anchor account criteria include the size of the company, industry affiliation, propensity to buy external consulting services and contacts within the account. The sales representative working closely with regional leadership is primarily responsible for identifying business opportunities in the account, acting as the single point of coordination for the client, and performing the general duties of account manager.
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Regional Accounts are accounts within a specified geographic location. These accounts mostly include large prospects, dormant clients, existing medium-sized clients and mid-tier market accounts and are handled primarily on an opportunistic basis, except for active clients where delivery teams are focused on driving additional revenue.
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Strategic Alliance Accounts are accounts that allow us to partner with organizations of greater scale or different skill sets or with software developers which enables all parties to jointly market their products and services to prospective clients.
MANAGEMENT SYSTEMS
Our management control systems are comprised of various accounting, billing, financial reporting, human resources, marketing and resource allocations systems, many of which are integrated with our knowledge management system, Mind~Share. We believe that Mind~Share significantly enhances our ability to serve our clients efficiently by allowing our knowledge base to be shared by all associates worldwide on a real-time basis. Our well-developed, flexible, scalable infrastructure has allowed us to quickly integrate the new employees and business systems we have acquired.
TALENT MANAGEMENT
We fully believe that our culture fosters intellectual creativity, collaboration and innovation. We believe in building relationships with both our associates and clients. We believe the best solutions come from teams of diverse individuals addressing problems collectively and from multiple dimensions, including the business, technological and human dimensions. We believe that the most effective working environment is one where everyone is encouraged to contribute and is rewarded for that contribution. Our core values are the strongest expression of our working style and represent what we stand for. These core values are:
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Continuous development of our associates, our unique content business model and our knowledge base;
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Diversity of backgrounds, skills and experiences;
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Knowledge capture, contribution and utilization; and
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Collaboration with one another, with our partners and with our clients
Our human resources staff includes seasoned professionals in North America, Europe and India who support our practices by, among other things, administering our benefit programs and facilitating the hiring process. Our human resources staff also includes dedicated individuals who recruit consultants with both business and technology expertise. Our recruiting team supports our hiring process by focusing on the highest demand solution areas of our business to ensure an adequate pipeline of new associates. We also have an employee referral program, which rewards existing employees who source new hires.
As of January 2, 2009, we had approximately 724 associates, approximately 76% of whom were billable professionals. We do not have any associates that are subject to collective bargaining arrangements; however, in France our associates enjoy the benefit of certain government mandated regulations based on industry classification. We have entered into nondisclosure and non-solicitation agreements with virtually all of our personnel. From time to time we also engage consultants as independent contractors.
COMMUNITY INVOLVEMENT
One important way we put our values into action is through our commitment to the communities where we work. The mission of our Community Council, which operates in each of the cities where we have offices, is to strive to leave the markets, communities and clients we serve better than how we found them. We do so by building a strong sense of community, with collaboration and personal interaction from all of our associates, through both volunteer and service programs and social gatherings.
AVAILABLE INFORMATION
We make our public filings with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all exhibits and amendments to these reports, available free of charge at our website http://www.thehackettgroup.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Any material that we file with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or at www.sec.gov. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
Also available on our website, free of charge, are copies of our Code of Conduct and Ethics, and the charter for the Audit Committee of our Board of Directors. We intend to disclose any amendment to, or waiver from, a provision of our Code of Conduct and Ethics applicable to our senior financial officers, including our Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and Corporate Controller on our website within four business days following the date of the amendment or waiver.
ITEM 1A.
ITEM 1A. RISK FACTORS
Our business is subject to risks. The following important factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Annual Report on Form 10-K or printed elsewhere by management from time to time.
Our results of operations could be negatively affected by global economic conditions.
Current global economic conditions may affect our clients’ businesses and the markets they serve. A substantial or prolonged economic downturn could adversely affect our clients’ financial condition which may reduce our clients’ demand for our services,
force price reductions, or cause project cancellations, or delay consulting services for which they have engaged us. In addition, if we are unable to successfully anticipate the changing economic conditions, we may be unable to effectively plan for and respond to those changes, and our business could be negatively affected.
Our quarterly operating results may vary.
Our financial results may fluctuate from quarter to quarter. In future quarters, our operating results may not meet public market analysts’ and investors’ expectations. If that happens, the price of our common stock may fall. Many factors can cause these fluctuations, including:
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the number, size, timing and scope of client engagements;
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customer concentration;
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long and unpredictable sales cycles;
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contract terms of client engagements;
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degrees of completion of client engagements;
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client engagement delays or cancellations;
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competition for and utilization of employees;
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how well we estimate the resources and effort we need to complete client engagements;
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the integration of acquired businesses;
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pricing changes in the industry;
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economic conditions specific to business and information technology consulting; and
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global economic conditions.
A high percentage of our operating expenses, particularly personnel and rent, are fixed in advance of any particular quarter. As a result, if we experience unanticipated changes in client engagements or in consultant utilization rates, we could experience large variations in quarterly operating results and losses in any particular quarter. Due to these factors, we believe our quarter-to-quarter operating results should not be used to predict future performance.
If we are unable to maintain our reputation and expand our name recognition, we may have difficulty attracting new business and retaining current clients and employees.
We believe that establishing and maintaining a good reputation and name recognition are critical for attracting and retaining clients and employees in our industry. We also believe that the importance of reputation and name recognition will continue to increase due to the number of providers of business consulting and IT services. If our reputation is damaged or if potential clients are not familiar with us or with the solutions we provide, we may be unable to attract new, or retain existing, clients and employees. Promotion and enhancement of our name will depend largely on our success in continuing to provide effective solutions. If clients do not perceive our solutions to be effective or of high quality, our brand name and reputation will suffer. In addition, if solutions we provide have defects, critical business functions of our clients may fail, and we could suffer adverse publicity as well as economic liability.
We depend heavily on a limited number of clients.
We have derived, and believe that we will continue to derive, a significant portion of our revenue from a limited number of clients for which we perform large projects. In 2008, our ten largest clients accounted for approximately 25% of our aggregate revenue. In addition, revenue from a large client may constitute a significant portion of our total revenue in any particular quarter. Our customer contracts generally can be cancelled for convenience by the customer upon 30 days’ notice. The loss of any of our large clients for any reason, including as a result of the acquisition of that client by another entity, our failure to meet that client’s expectations, the client’s decision to reduce spending on technology-related projects, or failure to collect amounts owed to us from our client could have a material adverse effect on our business, financial condition and results of operations.
We have risks associated with potential acquisitions or investments.
Since our inception, we have expanded through acquisitions. In the future, we plan to pursue additional acquisitions as opportunities arise. We may not be able to successfully integrate businesses, which we may acquire in the future without substantial expense, delays or other operational or financial problems. We may not be able to identify, acquire or profitably manage additional businesses. Also, acquisitions may involve a number of risks, including:
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diversion of management’s attention;
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failure to retain key personnel;
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failure to retain existing clients;
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unanticipated events or circumstances;
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unknown claims or liabilities;
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amortization of certain acquired intangible assets; and
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operating in new or unfamiliar geographies.
Client dissatisfaction or performance problems at a single acquired business could have a material adverse impact on our reputation as a whole. Further, we cannot assure you that our future acquired businesses will generate anticipated revenue or earnings.
Difficulties in integrating businesses we may acquire in the future may demand time and attention from our senior management.
Integrating businesses we may acquire in the future may involve unanticipated delays, costs and/or other operational and financial problems. In integrating acquired businesses, we may not achieve expected economies of scale or profitability or realize sufficient revenue to justify our investment. If we encounter unexpected problems at one of the acquired businesses as we try to integrate it into our business, our management may be required to expend time and attention to address the problems, which would divert their time and attention from other aspects of our business.
Our markets are highly competitive.
We may not be able to compete effectively with current or future competitors. The business consulting and IT services markets are highly competitive. We expect competition to further intensify as these markets continue to evolve. Some of our competitors have longer operating histories, larger client bases, longer relationships with their clients, greater brand or name recognition and significantly greater financial, technical and marketing resources than we do. As a result, our competitors may be in a stronger position to respond more quickly to new or emerging technologies and changes in client requirements and to devote greater resources than we can to the development, promotion and sale of their services. Competitors could lower their prices, potentially forcing us to lower our prices and suffer reduced operating margins. We face competition from international accounting firms; international, national and regional strategic consulting and systems implementation firms; and the IT services divisions of application software firms.
In addition, there are relatively low barriers to entry into the business consulting and IT services market. We do not own any patented technology that would stop competitors from entering this market and providing services similar to ours. As a result, the emergence of new competitors may pose a threat to our business. Existing or future competitors may develop and offer services that are superior to, or have greater market acceptance, than ours, which could significantly decrease our revenue and the value of your investment.
We may not be able to hire, train, motivate, retain and manage professional staff.
To succeed, we must hire, train, motivate, retain and manage highly skilled employees. Competition for skilled employees who can perform the services we offer is intense. We might not be able to hire enough skilled employees or train, motivate, retain and manage the employees we hire. This could hinder our ability to complete existing client engagements and bid for new ones. Hiring, training, motivating, retaining and managing employees with the skills we need is time-consuming and expensive.
We could lose money on our contracts.
As part of our strategy, from time to time, we enter into capped or fixed-price contracts, in addition to contracts based on payment for time and materials. Because of the complexity of many of our client engagements, accurately estimating the cost, scope and duration of a particular engagement can be a difficult task. We maintain an Office of Risk Management (“ORM”) that evaluates and attempts to mitigate delivery risk associated with complex projects. In connection with their review, ORM analyzes the critical estimates associated with these projects. If we fail to make these estimates accurately, we could be forced to devote additional resources to these engagements for which we will not receive additional compensation. To the extent that an expenditure of additional resources is required on an engagement, this could
reduce the profitability of, or result in a loss on, the engagement. In the past, we have, on occasion, engaged in negotiations with clients regarding changes to the cost, scope or duration of specific engagements. To the extent we do not sufficiently communicate to our clients, or our clients fail to adequately appreciate the nature and extent of any of these types of changes to an engagement, our reputation may be harmed and we may suffer losses on an engagement.
Lack of detailed written contracts could impair our ability to recognize revenue for services performed, collect fees, protect our IP and protect ourselves from liability to others.
We protect ourselves by entering into detailed written contracts with our clients covering the terms and contingencies of the client engagement. In some cases, however, consistent with what we believe to be industry practice, work is performed for clients on the basis of a limited statement of work or verbal agreement before a detailed written contract can be finalized. Revenue is not recognized on a project prior to receiving a signed contract. To the extent that we fail to have detailed written contracts in place, our ability to collect fees, protect our IP and protect ourselves from liability to others may be impaired.
Our corporate governance provisions may deter a financially attractive takeover attempt.
Provisions of our charter and by-laws may discourage, delay or prevent a merger or acquisition which shareholders may consider favorable, including transactions in which shareholders would receive a premium for their shares. These provisions include the following:
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shareholders must comply with advance notice requirements before raising a matter at a meeting of shareholders or nominating a director for election;
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our Board of Directors is staggered into three classes and the members may be removed only for cause upon the affirmative vote of holders of at least two-thirds of the shares entitled to vote;
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we would not be required to hold a special meeting to consider a takeover proposal unless holders of more than a majority of the shares entitled to vote on the matter were to submit a written demand or demands for us to do so; and
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our Board of Directors may, without obtaining shareholder approval, classify and issue up to 1,250,000 shares of preferred stock with powers, preferences, designations and rights that may make it more difficult for a third party to acquire us.
In addition, our Board of Directors has adopted a shareholder rights plan. Subject to certain exceptions, in the event that a person or group in the future becomes the beneficial owner of 15% or more of our common stock (or in the case of Liberty Wanger Asset Management, L.P. and its affiliates 20%), or commences, or publicly announces, an intention to commence a tender or exchange offer which would result in its ownership of 15% or more of our outstanding common stock, then the rights issued to our shareholders in connection with this plan will allow our shareholders to purchase shares of our common stock at 50% of its then current market value. In addition, if we are acquired in a merger, or 50% or more of our assets are sold in one or more related transactions, our shareholders would have the right to purchase the common stock of the acquiring company at half the then current market price of such common stock.
We may lose large clients or may not be able to secure targeted follow-on work or client retention rates.
Our client engagements are generally short-term arrangements, and most clients can reduce or cancel their contracts for our services with 30 days’ notice and without penalty. As a result, if we lose a major client or large client engagement, our revenue will be adversely affected. We perform varying amounts of work for specific clients from year to year. A major client in one year may not use our services in another year. In addition, we may derive revenue from a major client that constitutes a large portion of total revenue for particular quarters. If we lose any major clients or any of our clients cancel programs or significantly reduce the scope of a large engagement, our business, financial condition and results of operations could be materially and adversely affected. Also, if we fail to collect a large accounts receivable, we could be subjected to significant financial exposure. Consequently, you should not predict or anticipate our future revenue based upon the number of clients we currently have or the number and size of our existing client engagements.
We also derive a portion of our revenue from annual memberships for our Executive Advisory Programs. Our growth prospects therefore depend on our ability to achieve and sustain renewal rates on programs and to successfully launch new programs. Failure to achieve renewal rate levels or to successfully launch new programs and services could have an adverse effect on our operating results.
If we are unable to protect our IP rights or infringe on the IP rights of third parties, our business may be harmed.
We rely upon a combination of nondisclosure and other contractual arrangements and trade secret, copyright and trademark laws to protect our proprietary rights and the proprietary rights of third parties from whom we license IP. Although we enter into confidentiality agreements with our employees and limit distribution of proprietary information, there can be no assurance that the steps we have taken in this regard will be adequate to deter misappropriation of proprietary information, or that we will be able to detect unauthorized use and take appropriate steps to enforce our IP rights.
Although we believe that our services do not infringe on the IP rights of others and that we have all rights necessary to utilize the IP employed in our business, we are subject to the risk of claims alleging infringement of third-party IP rights. Any claims could require us to spend significant sums in litigation, pay damages, develop non-infringing IP or acquire licenses to the IP that is the subject of asserted infringement.
The market price of our common stock may fluctuate widely.
The market price of our common stock could fluctuate substantially due to:
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future announcements concerning us or our competitors;
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quarterly fluctuations in operating results;
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announcements of acquisitions or technological innovations;
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changes in earnings estimates or recommendations by analysts; or
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current market volatility.
In addition, the stock prices of many business and technology services companies fluctuate widely for reasons which may be unrelated to operating results. Fluctuation in the market price of our common stock may impact our ability to finance our operations and retain personnel.
We earn revenue, incur costs and maintain cash balances in multiple currencies, and currency fluctuations could adversely affect our financial results.
We have increasing international operations, where we earn revenue and incur costs in various foreign currencies, primarily the British Pound and the Euro. Doing business in these foreign currencies exposes us to foreign currency risks in numerous areas, including revenue, purchases, payroll and investments. Certain foreign currency exposures are naturally offset within an international business unit, because revenue and costs are denominated in the same foreign currency, and certain cash balances are held in U.S. Dollar denominated accounts. However, due to the increasing size and importance of our international operations, fluctuations in foreign currency exchange rates could materially impact our results. Currently, we do not hold any derivative contracts that hedge our foreign currency risk, but we may adopt such strategies in the future.
Our cash position includes amounts denominated in foreign currencies. We manage our worldwide cash requirements considering available funds from our subsidiaries and the cost effectiveness with which these funds can be accessed. The repatriation of cash balances from certain of our subsidiaries outside the U.S. could have adverse tax consequences and be limited by foreign currency exchange controls. However, those balances are generally available without legal restrictions to fund ordinary business operations. However, any fluctuations in foreign currency exchange rates could materially impact the availability and amount of these funds available for transfer.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
Our principal executive offices are currently located at 1001 Brickell Bay Drive, Suite 3000, Miami, Florida 33131. The lease on this premise covers 10,780 square feet and expires June 30, 2010. We also have offices in Atlanta, Philadelphia, Frankfurt, London, Paris, Hyderabad and Sydney. As of January 2, 2009, we had operating leases that extend through December 2016. We believe that we will be able to obtain suitable new or replacement space as needed. We do not own real estate and do not intend to invest in real estate or real estate-related assets.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are 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 our financial position, cash flows or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth quarter of 2008.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock traded on the NASDAQ Stock Market (“NASDAQ”) under the NASDAQ symbol, “ANSR” since our initial public offering on May 28, 1998 through January 31, 2008. In conjunction with our name change, we began trading on the NASDAQ under the NASDAQ symbol, “HCKT,” effective January 31, 2008. The following table sets forth for the fiscal periods indicated the high and low sales prices of the common stock, as reported on the NASDAQ.
The closing sale price for the common stock on March 6, 2009 was $2.25.
As of March 6, 2009, there were approximately 359 holders of record of our common stock and 39,188,148 shares of common stock outstanding.
Securities Authorized for Issuance Under Equity Compensation Plans
Information appearing under the caption “Equity Compensation Plan Information” in the 2009 Proxy Statement is hereby incorporated by reference.
Performance Graph
The following graph compares our cumulative total shareholder return since January 2, 2004 with the NASDAQ Composite Index and a Peer Group Index composed of other companies with similar business models identified below. The graph assumes that the value of the investment in our common stock and each index (including reinvestment of dividends) was $100 on January 2, 2004.
*$100 invested on 12/31/03 in stock & 12/04 in index including reinvestment of dividends.
Index calculated on month-end basis.
The Peer Group includes BearingPoint Inc., Diamond Management & Technology Consultants, eLoyalty Corporation, Sapient Corp and Technology Solutions Company.
Company Dividend Policy
We have not paid, nor do we expect to pay, any cash dividends on our common stock in the foreseeable future.
Purchases of Equity Securities
We have an ongoing authorization from our Board of Directors to repurchase shares of our common stock in the open market or in negotiated transactions. As of January 2, 2009, the cumulative authorization was for up to $55.0 million, with approximately $2.0 million available for future purchases. In the fiscal year ended January 2, 2009, we repurchased approximately $19.1 million of our common stock. This brings our cumulative purchases under the plan to $33.9 million. Subsequent to January 2, 2009, the Board of Directors approved an additional $5.0 million to our share repurchase program. All repurchases are made in the open market, subject to market conditions and trading restrictions. There is no expiration date on the current authorization and we did not make any determination to suspend or cancel purchases under the program. The following table summarizes our share repurchases during the year ended January 2, 2009:
* In February 2008, May 2008 and August 2008, the Board of Directors approved an additional $5.0 million, in each period, to our share repurchase program.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated financial data sets forth selected financial information for Hackett as of and for each of the years in the five-year period ended January 2, 2009, and has been derived from our audited financial statements. The selected consolidated financial data should be read together with our consolidated financial statements and related notes thereto and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(1) In November 2005, the Company purchased REL. As a result of the purchase, total revenue included $20.1 million in the 2006 results of operations.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
On January 1, 2008, we changed our corporate name from Answerthink, Inc. (“Answerthink”) to the Hackett Group, Inc. (“Hackett”). We were originally incorporated on April 23, 1997. Hackett 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.
Hackett is a strategic advisory firm and a world leader in best practice research, benchmarking, business transformation and working capital management services which empirically defines and enables world-class enterprise performance. Only Hackett empirically defines world-class performance in sales, general and administrative and supply chain activities with analysis gained through 4,000 benchmark studies over 15 years at 2,700 of the world’s leading companies.
Hackett’s combined capabilities include business advisory programs, benchmarking, business transformation, working capital management and technology solutions, with corresponding offshore support.
In the following discussion, “Hackett” represents our total Company, “The Hackett Group” encompasses our Benchmarking, Business Transformation and Executive Advisory groups, and “Hackett Technology Solutions” encompasses our technology groups, including SAP, Oracle and Hyperion.
Critical Accounting Policies
In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of results of operations and financial position in conformity with generally accepted accounting principles in the United States. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe the following discussion addresses our most critical accounting policies. These policies require management to exercise judgment that is often difficult, subjective and complex due to the necessity of estimating the effect of matters that are inherently uncertain.
Revenue Recognition
Our revenue is principally derived from fees for services generated on a project-by-project basis in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements, as amended by SAB No. 104, Revenue Recognition, net of sales tax. Revenue for services rendered is recognized on a time and materials basis or on a fixed-fee or capped-fee basis.
Revenue for time and materials contracts is recognized based on the number of hours worked by our consultants at an agreed upon rate per hour and is recognized in the period in which services are performed.
Revenue related to fixed-fee or capped-fee contracts is recognized on the proportional performance method of accounting based on the ratio of labor hours incurred to estimated total labor hours. This percentage is multiplied by the contracted dollar amount of the project to determine the amount of revenue to recognize in an accounting period. The contracted dollar amount used in this calculation excludes the amount the client pays us for reimbursable expenses. There are situations where the number of hours to complete projects may exceed our original estimate. These increases can be as a result of an increase in project scope, unforeseen events that arise, or the inability of the client or the delivery team to fulfill their responsibilities. On an on-going basis, our project delivery, Office of Risk Management and finance personnel review hours incurred and estimated total labor hours to complete projects. Any revisions in these estimates are reflected in the period in which they become known. If our estimates indicate that a contract loss will occur, a loss provision will be recorded in the period in which the loss first becomes probable and reasonably estimable. Contract losses are determined to be the amount by which the estimated direct costs of the contract exceed the estimated total revenues that will be generated by the contract and are included in total cost of service.
For contracts with multiple elements, revenue is allocated based on the fair value of the elements and is recognized in accordance with our accounting policies for each element, pursuant to Emerging Issues Task Force (“EITF”) Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables.
Additionally, we earn revenue from the sale of software, software licenses and maintenance contracts, which is recognized in accordance with Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition. Revenue for the sale of software and software licenses is recognized upon contract execution and customer receipt of software. Revenue from maintenance contracts and advisory services is recognized ratably over the life of the agreements.
Unbilled revenue represents revenue for services performed that have not been invoiced. If we do not accurately estimate the scope of the work to be performed, or we do not manage our projects properly within the planned periods of time, or we do not meet our clients’ expectations under the contracts, then future consulting margins may be negatively affected or losses on existing contracts may need to be recognized. Any such reductions in margins or contract losses could be material to our results of operations.
Revenue before reimbursements excludes reimbursable expenses charged to clients. Reimbursements, which include travel and out-of-pocket expenses, are included in revenue, and an equivalent amount of reimbursable expenses is included in cost of service.
The agreements entered into in connection with a project, whether time and materials based or fixed-fee or capped-fee based, typically allow our clients to terminate early due to breach or for convenience with 30 days’ notice. In the event of termination, the client is contractually required to pay for all time, materials and expenses incurred by us through the effective date of the termination. In addition, from time to time we enter into agreements with our clients that limit our right to enter into business relationships with specific competitors of that client for a specific time period. These provisions typically prohibit us from performing a defined range of services which we might otherwise be willing to perform for potential clients. These provisions are generally limited to six to twelve months and usually apply only to specific employees or the specific project team.
Allowances for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from our clients not making required payments. Periodically, we review accounts receivable to assess our estimates of collectibility. Management critically reviews accounts receivable and analyzes historical bad debts, past-due accounts, client credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our clients were to deteriorate, resulting in their inability to make payments, additional allowances may be required.
Goodwill and Long-Lived Identifiable Assets
We assess goodwill and long-lived identifiable assets for impairment when events or circumstances indicate that the carrying value may not be recoverable, or, at a minimum, on an annual basis. We have made determinations as to what our reporting units are and what amounts of goodwill and intangible assets should be allocated to those reporting units.
In assessing the recoverability of goodwill and long-lived identifiable assets, management makes assumptions regarding various factors to determine if impairment tests are met. These estimates contain management’s best judgment, using appropriate and customary assumptions available at the time.
Restructuring Reserves
Restructuring reserves reflect judgments and estimates of our ultimate costs of severance, closure and consolidation of facilities and settlement of contractual obligations under our operating leases, including sublease rental rates, absorption period to sublease space and other related costs. We reassess the reserve requirements to complete each individual plan under our restructuring programs at the end of each reporting period. If these estimates change in the future or actual results differ from our estimates, we may be required to record additional charges in the future.
Income Taxes
We record income taxes using the liability method. Under this method, we record deferred taxes based on temporary taxable and deductible differences between the tax bases of our assets and liabilities and our financial reporting bases. The liability method of accounting for deferred income taxes requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Effective December 30, 2006, we adopted Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes. FIN No. 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. We report the penalties and tax-related interest expense as a component of income tax expense in our consolidated statement of operations.
Contingent Liabilities
We have certain contingent liabilities that arise in the ordinary course of our business activities. We accrue contingent liabilities when it is probable that future expenditures will be made and that such expenditures can be reasonably estimated. Reserves for contingent liabilities are reflected in our consolidated financial statements based on management’s assessment, along with legal counsel, of the expected outcome of the contingencies. If the final outcome of our contingencies differs adversely from that currently expected, it would result in income or a charge to earnings when determined.
The foregoing list was not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for us to judge the application. There are also areas in which our judgment in selecting any available alternative would not produce a materially different result. Please see our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K, which contain accounting policies and other disclosures required by accounting principles generally accepted in the United States.
Results of Operations
Our fiscal year generally consists of a 52-week period and periodically consists of a 53-week period as each fiscal year ends on the Friday closest to December 31st. Fiscal years 2008, 2007 and 2006 ended on January 2, 2009, December 28, 2007 and December 29, 2006, respectively. References to a year included in this document refer to a fiscal year rather than a calendar year. The following table sets forth, for the periods indicated, our results of operations and the percentage relationship to total revenue of such results (in thousands):
Comparison of 2008 to 2007
Overview. We reported net income of $17.9 million in 2008, an increase of 99%, as compared to net income of $9.0 million in 2007, which primarily resulted from the continuing growth of The Hackett Group, which drives a higher gross margin than Hackett Technology Solutions. In 2007 we reported net income of $9.0 million which included a $2.6 million recovery from our former United Kingdom (UK) disbursement agent which is included in the loss (collections) from misappropriation, net.
Revenue. We are a global company with operations primarily in the United States and Western Europe. As a result, our revenue is denominated in multiple currencies, mostly the U.S. Dollar, British Pound and Euro, and is affected by currency exchange rate fluctuations. The exchange rate fluctuations had an impact on our revenue comparisons between 2007 and 2008; therefore, in the following revenue discussion we will disclose The Hackett Group revenue variances based on the U.S. Dollar reporting currency, as well as variances excluding the impact of currency fluctuations, otherwise referred to below as constant currency. Hackett Technology Solutions was not impacted by foreign currency rate fluctuations.
The following table summarizes revenue (in thousands):
Revenue increased 9%, or 10% in constant currency, to $192.1 million in 2008 from $177.0 million in 2007. The increase was primarily a result of the increase in The Hackett Group revenue of 19%, or 21% in constant currency, to $130.8 million in 2008, as compared to $110.3 million in 2007. The increase in The Hackett Group revenue was mostly a result of a change in our go-to-market strategy beginning in early 2007 with the introduction of a new transformational benchmark which integrates a benchmark with a strategic transformation plan, as well as our increased focus in Europe. As a result of the new strategy, we have seen an increase in the number of large multi-national clients and the average size of our engagements since the beginning of 2007, which is consistent with the expansion and positioning of our global strategic advisory delivery capabilities.
With the increase in our engagements with large multi-national clients, The Hackett Group has continued to realize strong international growth with a 20% increase in international revenue, or 29% in constant currency, in 2008. The Hackett Group’s international revenue, which is primarily based on the country of the contracting entity, represented 38%, or 39% in constant currency, of The Hackett Group’s total revenue in 2008, as compared to 38% in 2007.
The revenue increases in The Hackett Group were offset by revenue decreases in our Hackett Technology Solutions group of 8%, or $5.4 million, to $61.3 million in 2008, as compared to $66.7 million in 2007. The decrease in Hackett Technology Solutions revenue was primarily due to lower revenue from our Oracle group.
Reimbursements as a percentage of revenue were comparable at 10% during fiscal years 2008 and 2007. In fiscal years 2008 and 2007, no customer had revenue greater than 5% of total revenue.
Cost of Service. Cost of service primarily consists of salaries, benefits and incentive compensation for consultants and reimbursable expenses associated with projects. Cost of service before reimbursable expenses increased 5% to $96.8 million in 2008 from $91.9 million in 2007. The increase in cost of service before reimbursable expenses was primarily due to The Hackett Group’s higher headcount and cost per professional, which was consistent with its revenue growth and increased incentive compensation due to our improved Company performance, partially offset by headcount reductions in Hackett Technology Solutions in 2008, consistent with market demands. Cost of service is also denominated in multiple currencies and is therefore affected by currency exchange rate fluctuations.
Total cost of service as a percentage of revenue decreased to 60% in 2008, from 62% in 2007, mostly due to the increase in The Hackett Group’s revenue, partially offset by higher incentive compensation related to our improved Company performance in 2008. The growth in The Hackett Group gross revenue has resulted in a favorable impact to net income, as The Hackett Group generated gross margins of 46% in 2008, compared to Hackett Technology Solutions which generated gross margins of 28% for the same period. On a net revenue or revenue before reimbursements basis, The Hackett Group generated gross margins as a percentage of revenue of 51% in 2008, compared to Hackett Technology Solutions which generated gross margins as a percentage of net revenue of 32%, for the same period.
Selling, General and Administrative. Selling, general and administrative costs decreased 4% to $58.5 million in 2008 from $60.7 million in 2007. Additionally, as a percentage of revenue, selling, general and administrative costs decreased 4% to 30% in 2008, as compared to 34% in 2007. The decrease was primarily due to cost containment incentives initiated in early 2007 which resulted in the re-alignment of our sales force, revised incentive compensation plans, and other general and administrative headcount reductions, combined with higher gains on foreign currency transactions, partially offset by increased incentive compensation resulting from our improved Company performance in 2008.
Loss (Collections) from Misappropriation, net. The 2007 collection of $2.6 million related to funds that were misappropriated by our former UK disbursement agent. As described in the Form 8-K filed on November 1, 2006, on or about October 26, 2006, we learned of a misappropriation by our former disbursement agent which related to funds earmarked for payroll taxes due to the United Kingdom Inland Revenue. The disbursement agent had been utilized from early 2003 to January 2006. We agreed with our former disbursement agent to settlement terms that resulted in an initial cash payment to us in January 2007 of $350 thousand and the final cash payment of $2.2 million in October 2007. The collections were accounted for as income in the period collected.
Loss on Marketable Investments. As of January 2, 2009 we had an investment in Bank of America’s Columbia Strategic Cash Portfolio (“Portfolio”). On December 10, 2007, we were notified by the financial institution that the Portfolio was closing and being liquidated and that all redemptions would be suspended. Based on the Portfolio information available to us, the market outlook, and the expected timing of the remaining redemptions, we recorded a loss on the marketable investments of $450 thousand in the year ended December 28, 2007. As of January 2, 2009, we had a net balance of $1.7 million remaining in the Portfolio, of which $238 thousand remained in the reserve. No additional reserve was recorded in 2008.
Income Taxes. In 2008, we recorded income tax expense of $465 thousand, which represented an effective tax rate of 2.5% of our income before income tax. In 2007, we recorded income tax expense of $278 thousand, which represented an effective tax rate of 3.0% of our income before income tax. The liability method of accounting for deferred income taxes requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In determining the need for valuation allowances we consider evidence such as history of losses and general economic conditions. We have approximately $51.5 million of U.S. federal net operating loss carryforwards as of January 2, 2009, most of which will expire in 2022 if not utilized. A full valuation allowance has been provided for all net operating loss carryforwards. Additionally, as of January 2, 2009, we had approximately $11.0 million of foreign net operating loss carryforwards, of which $3.7 million related to operations in the UK and $2.2 million related to operations in Germany. Most of the foreign net operating losses can be carried forward indefinitely.
Comparison of 2007 to 2006
Overview. We are a global company with operations primarily in the United States and Western Europe. As a result, our revenue and cost of sales are denominated in multiple currencies, mostly the U.S. Dollar, British Pound and Euro, and is affected by currency exchange rate fluctuations. The exchange rate fluctuations did not have a significant impact on our comparisons between 2006 and 2007. We reported net income of $9.0 million in 2007, as compared to a net loss of $5.0 million in 2006. The primary reason for the improvement resulted from changes in the composition of our revenue. The Hackett Group revenue increased 19% in 2007 compared to 2006, but was offset by a decrease in Hackett Technology Solutions revenue of 24%. However, gross margins grew 2% overall in 2007, as compared to 2006. In 2007, The Hackett Group generated gross margins of 43%, while Hackett Technology Solutions generated gross margins of 27%. Additionally, net income in 2007 included a $2.6 million recovery from our former UK disbursement agent which was included in the loss (collections) from misappropriation, net.
Our net loss of $5.0 million in 2006 included restructuring costs of $6.3 million, non-cash stock compensation expense of $4.1 million and a loss from misappropriations of $341 thousand.
Revenue. The following table summarizes revenue (in thousands):
Revenue decreased 2% to $177.0 million in 2007 from $180.6 million in 2006. The Hackett Group revenue increased 19%, or $17.5 million, to $110.3 million in 2007, as compared to $92.8 million in 2006. This growth was primarily attributable to a 17%, or $14.1 million, increase in Benchmarking and Business Transformation, and a 28%, or $3.3 million, increase in Executive Advisory Programs from 2006. The increase in The Hackett Group revenue was mostly a result of a change in our go-to-market strategy beginning in early 2007 in which we emphasized customer relationship optimization across all The Hackett Group offerings. Additionally, The Hackett Group realized strong growth in Europe with a 93% increase in revenue in 2007, as compared to 2006.
The revenue increase in The Hackett Group was offset by a revenue decrease in Hackett Technology Solutions of 24%, or $21.0 million, to $66.7 million in 2007, as compared to $87.7 million in 2006. This decrease in revenue in Hackett Technology Solutions was primarily due to the de-emphasis of application staff augmentation work at the end of 2006 and lower revenue from Oracle and Hyperion.
This change in revenue composition resulted in a favorable impact to net income, as The Hackett Group revenue generated a 43% gross margin in 2007, as compared to Hackett Technology Solutions which generated a 27% gross margin for the same period.
Reimbursements as a percentage of revenue were comparable at 10% during fiscal years 2007 and 2006. In fiscal years 2007 and 2006, no customer had revenue equal to or greater than 5% of total revenue.
Cost of Service. Cost of service primarily consists of salaries, benefits and incentive compensation for consultants and reimbursable expenses associated with projects. Cost of service before reimbursable expenses decreased 5% to $91.9 million in 2007 from $96.6 million in 2006. This decrease was primarily attributable to a decrease in Hackett Technology Solution’s headcount as a result of our de-emphasis of application staff augmentation work at the end of 2006. Total cost of service as a percentage of revenue was 62% in 2007, as compared to 64% in 2006.
Selling, General and Administrative. Selling, general and administrative costs decreased 4% to $60.7 million in 2007 from $63.5 million in 2006, due to lower intangible asset amortization expense of $1.3 million as assets began reaching full amortization. Selling, general and administrative costs as a percentage of revenue were comparable at 34% in 2007 and 35% in 2006.
Restructuring Costs. Restructuring costs were $6.3 million in 2006. The restructuring costs recorded in 2006 were comprised of $2.8 million relating to the 2005 restructuring for the consolidation of additional facilities and related exit costs primarily as a result of the REL acquisition and $3.5 million for increases in previously established reserves in 2002 and 2001 for the closure and consolidation of facilities to account for higher estimated losses on the sublease of facilities as a result of lower than expected sublease rates and longer than expected time estimates to sublease facilities based on current market conditions. Included in the $2.8 million was a further reduction of occupied space in our technology focused facility in Philadelphia and related severance costs for a senior executive as our primary business model shifted to a proprietary best practice and intellectual capital and strategic advisory services firm. We did not record any restructuring costs in 2007.
Loss (Collections) From Misappropriation, net. The collections of $2.6 million from the misappropriation in 2007 and loss of $341 thousand from the misappropriation in 2006 related to funds that were misappropriated by our former UK disbursement agent. As described in the Form 8-K filed on November 1, 2006, on or about October 26, 2006, we learned of a misappropriation by our former disbursement agent which related to funds earmarked for payroll taxes due to the United Kingdom Inland Revenue. The disbursement agent had been utilized from early 2003 to January 2006. We agreed with our former disbursement agent to settlement terms that resulted in an initial cash payment to us in January 2007 of $350 thousand and the final cash payment of $2.2 million in October 2007. The collections were accounted for as income in the period collected.
Loss on Marketable Investments. As of December 28, 2007, we had $7.0 million invested in the Portfolio. On December 10, 2007, we were notified by the financial institution that the Portfolio was closing and being liquidated and that all redemptions would be suspended. Based on the Portfolio information available to us, the market outlook, and the expected timing of the remaining redemptions, we estimated the fair value of the remaining Portfolio shares to be $0.94 per share (par value representing $1.00) and as such, recorded a loss on the marketable investments of $450 thousand.
Income Taxes. In 2007, we recorded income tax expense of $278 thousand, which represented an effective tax rate of 3.0% of our income before income tax. In 2006, we recorded income tax expense of $913 thousand, which represented an effective tax rate of 22.2% of our loss before income taxes. These taxes are primarily attributable to federal and state taxes related to REL’s U.S. entity, which could not be offset against our federal net operating loss carryforward for the first six months of 2006. The liability method of accounting for deferred income taxes requires that a change in the valuation allowance for deferred tax assets be included in income tax expense or benefit for the current year. The liability method of accounting for deferred income taxes requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In determining the need for valuation allowances we consider evidence such as history of losses and general economic conditions. We had approximately $65.1 million of U.S. federal net operating loss carryforwards as of December 28, 2007, most of which will expire in 2022 if not utilized. A full valuation allowance has been provided for all net operating loss carryforwards. Additionally, as of December 28, 2007, we had approximately $11.9 million of foreign net operating loss carryforwards, of which $5.4 million related to operations in the UK. Most of the foreign net operating losses can be carried forward indefinitely.
Liquidity and Capital Resources
As of January 2, 2009 and December 28, 2007, we had $32.1 million and $20.1 million of cash and cash equivalents, respectively. We had a total of $600 thousand as of January 2, 2009 and December 28, 2007, on deposit with financial institutions as collateral for letters of credit and have classified these deposits as restricted cash on the consolidated balance sheets. Additionally, at January 2, 2009 and December 28, 2007, we had a net balance of $1.7 million and $7.0 million, respectively, in Bank of America’s Columbia Strategic Cash Portfolio (“Portfolio”) which was classified as marketable investments on the consolidated balance sheets.
The following table summarizes our cash flow activity (in thousands):
Net cash provided by operating activities was $27.5 million in 2008, as compared to $21.6 million in 2007. During 2008, net cash provided by operating activities was primarily attributable to net income of $17.9 million, net of non-cash items including foreign currency gains, depreciation and amortization expense, and non-cash stock compensation expense. Additionally, we had higher accounts receivable collections of $5.5 million resulting in a decrease in days sales outstanding of 9 days to 51 days as of January 2, 2009 from 60 days as of December 28, 2007.
During 2007, net cash provided by operating activities was primarily attributable to net income of $9.0 million, including $2.6 million recovery from the misappropriation, and a decrease of $6.2 million in accounts receivable and unbilled revenue resulting in a decrease in days sales outstanding of 25 days to 60 days from December 29, 2006 to December 28, 2007.
Net cash provided by investing activities was $3.1 million in 2008, as compared to net cash used in investing activities of $616 thousand in 2007. During 2008, net cash provided by investing activities was primarily attributable to $5.3 million of Portfolio redemptions, partially offset by $2.2 million in capital expenditures.
During 2007, net cash used in investing activities was primarily attributable to $2.6 million of purchases related to computer software and equipment and the build-out of new office space in the UK and the final payment of our purchase price on the REL acquisition of $1.3 million. This use of cash was mostly offset by net redemptions of marketable investments of $3.3 million.
Net cash used in financing activities was $18.3 million in 2008, as compared to $9.7 million in 2007. During 2008, cash used in financing activities was primarily attributable to the repurchase of 4.5 million shares of our common stock at an average price of $4.27 per share for $19.1 million. Partially offsetting the 2008 share buybacks were the proceeds from the sale of stock as a result of stock sold through the Employee Stock Purchase Plan of $527 thousand and exercises of stock options of $230 thousand.
During 2007, the cash used in financing activities was primarily attributable to the repurchase of 2.7 million shares of our common stock for $10.1 million, partially offset by $379 thousand from the sale of stock as a result of exercises of stock options and the sale of stock through our Employee Stock Purchase Plan.
On July 30, 2002, we announced that our Board of Directors approved the repurchase of up to $5.0 million of our common stock. Since the inception of our repurchase plan, our Board of Directors has approved the repurchase of an additional aggregate $50.0 million of our common stock, thereby increasing the total program size to $55.0 million as of January 2, 2009. Under the repurchase plan, we may buy back shares of our outstanding stock from time to time either on the open market or through privately negotiated transactions, subject to market conditions and trading restrictions. As of January 2, 2009, we had repurchased 14.4 million shares of our common stock at an average price of $3.70 per share. We hold repurchased shares of our common stock as treasury stock on our consolidated balance sheets. Subsequent to January 2, 2009, our Board of Directors approved the repurchase of an additional $5.0 million of our common stock, thereby increasing the total program size to $60.0 million.
In November 2005, we purchased REL and under the terms of the Share Purchase Agreement, the stockholders of REL received aggregate cash of $21.3 million upon closing. During 2006, $6.9 million of deferred consideration was paid and in 2007, $1.3 million was paid to the stockholders for final payment of the purchase price. The excess of the purchase price of the acquisition over the estimated fair value of the net identifiable assets acquired was recorded as $5.3 million of intangible assets and $25.8 million of goodwill. The intangible assets are being amortized over periods ranging from 6 months to 5 years.
We currently believe that available funds 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 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.
There were no material capital commitments at January 2, 2009. The following summarizes our lease commitments under our non-cancelable operating leases for premises having a remaining term in excess of one year as of January 2, 2009 (in thousands):
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of January 2, 2009.
Recently Issued Accounting Standards
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162 identifies the sources of accounting principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities. SFAS No. 162 was effective on November 2008. The adoption of SFAS No. 162 did not have a material impact on our consolidated financial statements.
In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets. FSP No. 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS No. 142, Goodwill and Other Intangible Assets. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP No. 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. We do not expect that the adoption of FSP No. 142-3 will have a material impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations. This standard establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. This standard also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2008. We do not expect that the implementation of this statement will have a material impact on our consolidated financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of January 2, 2009, our exposure to market risk related primarily to changes in interest rates and foreign currency exchange rate risks.
Interest Rate Risk
We invest only with high credit quality issuers and we do not use derivative financial instruments in our investment Portfolio. As of January 2, 2009, we had a net balance of $1.7 million in Bank of America’s Columbia Strategic Cash Portfolio (“Portfolio”) which was closed to redemptions and to new investors effective December 7, 2007, and is currently under liquidation. We have recorded the Portfolio at fair market value in the accompanying consolidated balance sheets which includes realized and unrealized losses totaling $450 thousand in 2007 and 2008. Based on the market outlook and information relating to the Portfolio, there may be further changes in the fair value of the Portfolio. To the extent we determine there is a further change in fair value, we will recognize additional losses in future periods up to the aggregate amount of our investment.
Exchange Rate Sensitivity
We face exposure to adverse movements in foreign currency exchange rates, as a significant portion of our revenue, expenses, assets and liabilities are denominated in currencies other than the U.S. Dollar, primarily the British Pound and the Euro. These exposures may change over time as business practices evolve. Currently, we do not hold any derivative contracts that hedge our foreign currency risk, but we may adopt such strategies in the future.
For a discussion of the risks we face as a result of foreign currency fluctuations, please see “Item 1A, “Risk Factors” in Part I.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE HACKETT GROUP, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Report of Independent Registered Certified Public Accounting Firm
Board of Directors and Shareholders
The Hackett Group, Inc.
Miami, Florida
We have audited the accompanying consolidated balance sheets of The Hackett Group, Inc. (formerly Answerthink, Inc., prior to January 1, 2008) as of January 2, 2009 and December 28, 2007 and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended January 2, 2009. In connection with our audits of the financial statements, we have also audited the financial statement schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Hackett Group, Inc. at January 2, 2009 and December 28, 2007, and the results of its operations and its cash flows for each of the three years in the period ended January 2, 2009, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 11 to the consolidated financial statements, in the year ended December 28, 2007, the Company changed the manner in which it accounts for uncertainty in income taxes due to the adoption of Financial Accounting Standard Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The Hackett Group, Inc.’s internal control over financial reporting as of January 2, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 18, 2009 expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
Miami, Florida
March 18, 2009
THE HACKETT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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)
The accompanying notes are an integral part of the consolidated financial statements.
THE HACKETT GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
The accompanying notes are an integral part of the consolidated financial statements.
THE HACKETT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of the consolidated financial statements.
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Significant Accounting Policies
Nature of Business
On January 1, 2008, the Company changed its name from Answerthink, Inc. (“Answerthink”) to The Hackett Group, Inc. (“Hackett,” or the “Company”). The firm was originally incorporated on April 23, 1997. All prior references to Answerthink will now be reflected as Hackett as if the name change was effected for all years presented.
Hackett is a leading strategic advisory and technology consulting firm that enables companies to achieve world-class business performance. Hackett’s combined capabilities include business advisory programs, benchmarking, business transformation, working capital management and technology solutions, with corresponding offshore support.
Basis of Presentation and Consolidation
The accompanying consolidated financial statements include the Company’s accounts and those of its wholly owned subsidiaries which the Company is required to consolidate. The Company consolidates the assets, liabilities, and results of operations of its entities in accordance with Accounting Research Bulletin (“ARB”) No. 51, Consolidated Financial Statements, Statement of Financial Accounting Standards (“SFAS”) No. 94, Consolidation of All Majority-Owned Subsidiaries - an amendment of ARB No. 51, with related amendments of Accounting Principles Board (“APB”) Opinion No. 18 and ARB No. 43, Chapter 12, and the Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46, Consolidation of Variable Interest Entities, as revised.
Fiscal Year
The Company’s fiscal year generally consists of a 52-week period and periodically consists of a 53-week period because the fiscal year ends on the Friday closest to December 31st. Fiscal years 2008, 2007, and 2006 ended on January 2, 2009, December 28, 2007 and December 29, 2006, respectively. References to a year included in the consolidated financial statements refer to a fiscal year rather than a calendar year.
Cash and Cash Equivalents and Restricted Cash
The Company considers all short-term investments with maturities of three months or less to be cash equivalents. Due to the short maturity period of cash equivalents, the carrying amount of these instruments approximates fair market value. The Company places its temporary cash investments with high credit quality financial institutions. At times, such investments may be in excess of the F.D.I.C. insurance limits. The Company has not experienced any loss to date on these investments.
Restricted cash in 2008 and 2007 related to letters of credit to secure the Company’s obligations in various operating leases.
Marketable Investments
Marketable investments are accounted for in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. This standard requires that debt and equity securities be classified as trading, available-for-sale or held-to-maturity. As of January 2, 2009 and December 28, 2007 all of the Company’s marketable securities were available-for-sale securities which are recorded at fair market value. Unrealized gains and losses on these investments are reported in comprehensive income or loss and are accumulated as a separate component of shareholders’ equity, net of any related tax effect. Declines in value that are judged to be other than temporary result in a reduction of the carrying amount of the investment to fair value and the recognition of a loss in other income (expense). For the purpose of determining realized gains and losses, the cost of securities sold is based upon specific identification. Interest on marketable investments is recognized when earned and is reported as a component of interest income in the accompanying consolidated statements of operations.
As of January 2, 2009 and December 28, 2007, the Company had a net balance of $1.7 million and $7.0 million, respectively, in Bank of America’s Columbia Strategic Cash Portfolio (“Portfolio”). On December 7, 2007, the Portfolio was closed for redemptions and to new investors and is currently under liquidation.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from its clients not making required payments. Management makes estimates of the collectibility of the accounts receivables. Management critically reviews accounts receivable and analyzes historical bad debts, past-due accounts, client credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts.
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Significant Accounting Policies (continued)
Property and Equipment, Net
Property and equipment are recorded at cost. Depreciation is calculated to amortize the depreciable assets over their useful lives using the straight-line method and commences when the asset is placed in service. The range of estimated useful lives is three to five years. Leasehold improvements are amortized on a straight-line basis over the term of the lease or the estimated useful life of the improvement, whichever is shorter. Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for betterments and major improvements are capitalized. The carrying amount of assets sold or retired and related accumulated depreciation are removed from the balance sheet in the year of disposal and any resulting gains or losses are included in the statement of operations.
The Company capitalizes the costs of internal-use software in accordance with Statement of Position (“SOP”) No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 provides guidance on applying generally accepted accounting principles in the United States in addressing whether and under what conditions the costs of internal-use software should be capitalized. The Company capitalizes certain costs, which generally include hardware, software, and payroll-related costs for employees who are directly associated with and who devote time to the development of internal-use computer software.
Long-Lived Assets (excluding Goodwill and Other Intangible Assets)
The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 144, Accounting for the Impairment of Long-Lived Assets, which requires that long-lived assets be reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. An impairment loss is recognized if the sum of the long-term undiscounted cash flows is less than the carrying amount of the long-lived assets being evaluated.
Goodwill and Other Intangible Assets
All of the Company’s goodwill and intangible assets have been accounted for under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets deemed to have indefinite lives not be amortized, but rather be tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate potential impairment. Finite-lived intangible assets are required to be amortized over their useful lives and are subject to impairment evaluation under the provisions of SFAS No. 144. The excess cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill.
Goodwill is tested at least annually for impairment. Other intangible assets are tested for potential impairment whenever events or changes in circumstances suggest that the carrying value of an asset may not be fully recoverable in accordance with SFAS No. 144. Other intangible assets arise from business combinations and consist of customer relationships, restricted covenants related to employment agreements, customer backlog and trademarks that are amortized on a straight-line basis over periods of up to five years. Goodwill is tested for impairment at the reporting unit level at least annually utilizing a “fair value” methodology. The Company evaluates the fair values of its reporting units utilizing various techniques. The reporting units consist of The Hackett Group (including Benchmarking, Business Transformation and Executive Advisory Programs) and Hackett Technology Solutions (including SAP, Oracle and Hyperion). In assessing the recoverability of goodwill and intangible assets, the Company makes assumptions regarding various factors to determine if impairment tests are met. These estimates contain management’s best judgment, using appropriate and customary assumptions available at the time. The Company performed its annual impairment test of goodwill in the fourth quarter of fiscal years 2008, 2007 and 2006 and determined that goodwill was not impaired.
Revenue Recognition
The Company principally derives revenue from fees for services generated on a project-by-project basis in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements, as amended by SAB No. 104, Revenue Recognition, net of sales tax. Revenue for services rendered is recognized on a time and materials basis or on a fixed-fee or capped-fee basis.
Revenue related to fixed-fee or capped-fee contracts is recognized on the proportional performance method of accounting based on the ratio of labor hours incurred to estimated total labor hours. This percentage is multiplied by the contracted dollar amount of the project to determine the amount of revenue to recognize in an accounting period. The contracted dollar amount used in this calculation excludes the amount the client pays the Company for reimbursable expenses. There are situations where the number of hours to
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Significant Accounting Policies (continued)
complete projects may exceed the Company’s original estimate. These increases can be as a result of an increase in project scope, unforeseen events that arise, or the inability of the client or the delivery team to fulfill their responsibilities. On an on-going basis, the Company’s project delivery, Office of Risk Management and finance personnel review hours incurred and estimated total labor hours to complete projects. Any revisions in these estimates are reflected in the period in which they become known. If the Company’s estimates indicate that a contract loss will occur, a loss provision will be recorded in the period in which the loss first becomes probable and reasonably estimable. Contract losses are determined to be the amount by which the estimated direct costs of the contract exceed the estimated total revenue that will be generated by the contract and are included in total cost of service.
For contracts with multiple elements, revenue is allocated based on the fair value of the elements and is recognized in accordance with the Company’s accounting policies for each element, pursuant to Emerging Issues Task Force (“EITF”) Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables.
Additionally, the Company earns revenue from the sale of software, software licenses and maintenance contracts, which is recognized in accordance with Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition. Revenue for the sale of software and software licenses is recognized upon contract execution and customer receipt of software. Revenue from maintenance contracts and advisory services is recognized ratably over the life of the agreements.
Unbilled revenue represents revenue for services performed that have not been invoiced. If the Company does not accurately estimate the scope of the work to be performed, or does not manage its projects properly within the planned periods of time or does not meet the clients’ expectations under the contracts, then future consulting margins may be negatively affected or losses on existing contracts may need to be recognized. Any such resulting reductions in margins or contract losses could be material to the Company’s results of operations.
Revenue before reimbursements exclude reimbursable expenses charged to clients. Reimbursements, which include travel and out-of-pocket expenses, are included in revenue, and an equivalent amount of reimbursable expenses is included in cost of service.
The agreements entered into in connection with a project, whether on a time and materials basis or fixed-fee or capped-fee basis, typically allow the Company’s clients to terminate early due to breach, or for convenience, with 30 days’ notice. In the event of termination, the client is contractually required to pay for all time, materials and expenses incurred by the Company through the effective date of the termination. In addition, from time to time the Company enters into agreements with clients that limit the Company’s right to enter into business relationships with specific competitors of that client for a specific time period. These provisions typically prohibit the Company from performing a defined range of services that it might otherwise be willing to perform for potential clients. These provisions are generally limited to six to twelve months and usually apply only to specific employees or the specific project team.
Stock Based Compensation
On December 31, 2005, the Company adopted the provisions of SFAS No. 123R, Share-based Payment, using the modified-prospective-transition method. Under this transition method, compensation expense recognized during the years ended January 2, 2009, December 28, 2007 and December 29, 2006 included: (a) compensation expense for all share-based awards granted prior to, but not yet vested, as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation expense for all share-based awards granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R.
SFAS No. 123R requires entities to recognize compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). This Statement also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as prescribed under the prior accounting rules. This requirement reduces net operating cash flows and increases net financing cash flows in periods after adoption. Total cash flow remains unchanged from what would have been reported under prior accounting rules. Upon the adoption of SFAS No. 123R, the Company recognized an immaterial one-time gain based on SFAS No. 123R’s requirement to apply an estimated forfeiture rate to unvested restricted stock and restricted stock unit awards. Previously, the Company recorded forfeitures as incurred for such awards.
As a result of adopting SFAS No. 123R, the charge to net earnings for the years ended January 2, 2009, December 28, 2007 and December 29, 2006 were $25 thousand, $204 thousand and $486 thousand, respectively. The impact of adopting SFAS No. 123R on basic and diluted earnings per share for the years ended January 2, 2009, December 28, 2007 and December 29, 2006 was $0.00, $0.00 and $0.01 per share, respectively.
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Significant Accounting Policies (continued)
In November 2005, the FASB issued Staff Position (“FSP”) No. 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. This pronouncement provides an alternative transition method of calculating the excess tax benefits available to absorb any tax deficiencies recognized subsequent to the adoption of SFAS No. 123(R). The Company has elected to adopt the alternative transition method.
Income Taxes
Income taxes are accounted for in accordance with SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between the financial reporting carrying values and tax bases of assets and liabilities, and are measured by using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to reverse. Deferred income taxes also reflect the impact of certain state operating loss and tax credit carryforwards. A valuation allowance is provided if the Company believes it is more likely than not that all or some portion of the deferred tax asset will not be realized. An increase or decrease in the valuation allowance, if any, that results from a change in circumstances, and which causes a change in the Company’s judgment about the realizability of the related deferred tax asset, is included in the current tax provision.
Effective December 30, 2006, the Company adopted FIN No. 48, Accounting for Uncertainty in Income Taxes. FIN No. 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. The Company reports penalties and tax-related interest expense as a component of income tax expense.
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 restricted stock units issued to employees, the calculation includes only the vested portion of such stock. Net income per share assuming dilution is computed by dividing the 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 shares:
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, restricted cash, marketable investments, accounts receivable and unbilled revenue, accounts payable and accrued expenses and other liabilities.
As of January 2, 2009, the Company had a net balance of $1.7 million invested in the Portfolio which was closed to redemptions and to new investors effective December 7, 2007 and is currently under liquidation. The Company recorded the Portfolio at fair market value in the accompanying consolidated balance sheets (see Note 4).
As of January 2, 2009 and December 28, 2007, the fair value of all financial instruments approximated their carrying value due to the short-term nature of these instruments.
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Significant Accounting Policies (continued)
Concentration of Credit Risk
The Company provides services primarily to Global 2000 companies and other sophisticated buyers of business consulting and information technology services. The Company performs ongoing credit evaluations of its major customers and maintains reserves for potential credit losses. In fiscal years 2008, 2007 and 2006, no customer accounted for more than 5% of total revenue.
Management’s Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Other Comprehensive Income
The Company reports its comprehensive income in accordance with SFAS No. 130, Reporting Comprehensive Income, which establishes standards for reporting and presenting comprehensive income and its components in a full set of financial statements. Other comprehensive income consists of unrealized gains and losses on available-for-sale securities, and cumulative currency translation adjustments.
Translation of Non-U.S. Currency Amounts
The assets and liabilities held by the Company’s foreign entities with a functional currency other than the U.S. Dollar are translated into U.S. Dollars at exchange rates in effect at the end of each reporting period. Foreign entity revenue and expenses are translated into U.S. Dollars at the average rates that prevailed during the period. The resulting net translation gains and losses are reported as foreign currency translation adjustments in shareholders’ equity as a component of accumulated other comprehensive income. Gains and losses from foreign currency transactions are included in net income.
Segment Reporting
The Company reports business segment information under the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. In accordance with this Statement, the Company engages in business activities in one operating segment, which provides business and technology consulting services.
Recent Accounting Pronouncements
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162 identifies the sources of accounting principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities. SFAS No. 162 was effective on November 2008. The adoption of SFAS No. 162 did not have a material impact on the Company's consolidated financial statements.
In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets. FSP No. 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS No. 142, Goodwill and Other Intangible Assets. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP No. 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The Company does not expect that the adoption of FSP No. 142-3 will have a material impact on the Company's consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations. This standard establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. This standard also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company does not expect that the implementation of this statement will have a material impact on its consolidated financial statements.
Reclassifications
Certain prior year amounts in the consolidated financial statements have been reclassified to conform to current year presentation.
2. Acquisitions and Investing Activities
During the year ended December 30, 2005, the Company completed the acquisition of two businesses which provide information technology services (collectively, the “Acquired Entities”). Aggregate consideration for the Acquired Entities was $35.0 million. This amount has been allocated, on an entity-by-entity basis, to the assets acquired and liabilities assumed based on their respective fair values on the dates of acquisition.
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Acquisitions and Investing Activities (continued)
The components of the purchase price allocation for the Acquired Entities, contingent consideration earned for previous acquisitions, and fees and expenses incurred are as follows (in thousands):
For each acquisition, the excess of the purchase price including any contingent consideration over the estimated fair value of the net identifiable tangible and intangible assets acquired has been recorded as goodwill. In November 2005, the Company purchased REL Consultancy Group Limited (“REL”), a privately-held UK company that provides working capital management advisory services primarily in Europe and the U.S. Under the terms of the Share Purchase Agreement, the stockholders of REL received aggregate cash of $21.3 million upon closing. During 2006, $6.9 million of deferred consideration was paid and during 2007, $1.3 million was paid to the stockholders for final payment of the purchase price. The excess of the purchase price of the acquisition over the estimated fair value of the net identifiable assets acquired has been recorded as $5.3 million of intangible assets and $25.8 million of goodwill. The intangible assets are being amortized over periods ranging from 6 months to 5 years.
In connection with the acquisition, the Company recorded liabilities of $2.6 million for termination obligations, in accordance with EITF No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination. The Company has recognized these obligations as a liability assumed as of the acquisition date. These termination obligations consisted of $1.4 million of employee separation costs and $1.2 million related to the closure of redundant REL real estate facilities, the majority of which were paid during 2006.
As of January 2, 2009 and December 28, 2007, all deferred payments and consideration related to acquisitions had been settled.
The Company includes its acquired intangible assets with definitive lives in other assets in the accompanying consolidated balance sheets. As of January 2, 2009 and December 28, 2007, intangible assets totaled $1.2 million and $2.2 million, respectively, which is net of accumulated amortization of $9.3 million and $8.6 million, respectively, and foreign currency fluctuations for intangible assets denominated in the British Pound. Acquired intangible assets with definite lives are amortized over periods ranging from 6 months to 5 years. Amortization expense for such intangible assets was $0.7 million, $1.4 million and $2.6 million for the fiscal years ended January 2, 2009, December 28, 2007 and December 29, 2006, respectively.
All of the Company’s intangible assets are expected to be fully depreciated by the end of 2010. The estimated future amortization expense of intangible assets as of January 2, 2009 is as follows (in thousands): $649 thousand in 2009 and $595 thousand in 2010.
3. Loss (Collections) from Misappropriation, net
As described in the Form 8-K filed on November 1, 2006, on or about October 26, 2006, the Company learned of a misappropriation by its former UK disbursement agent which related to funds earmarked for payroll taxes due to the United Kingdom Inland Revenue. The disbursement agent had been utilized from early 2003 to January 2006 to make payroll, payroll tax and vendor disbursements for our UK operations. The Company initiated a review of the matter, and concluded that the total loss resulting from the misappropriation was $2.2 million (at historical foreign currency exchange rates), of which $1.9 million related to 2005, 2004 and 2003. The total loss was comprised of payroll taxes that were not disbursed to the United Kingdom Inland Revenue of $1.8 million, interest owing on past due payroll tax amounts of $0.1 million, and the write-off of funds owed back to the Company from the agent of $0.3 million.
The Company and its former disbursement agent agreed to settlement terms that resulted in an initial cash payment to the Company in January 2007 of $350 thousand and the final cash payment of $2.2 million (using foreign currency exchange rate at December 28, 2007) in October 2007. The collections were accounted for as income in the period collected.
4. Fair Value Measurement
The Company adopted SFAS No. 157, Fair Value Measurements, on December 29, 2007. SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Fair Value Measurement (continued)
advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS No. 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. SFAS No. 157 describes the following three levels of inputs that may be used to measure fair value:
Level 1: Quoted market prices in active markets for identical assets or liabilities
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs that are not corroborated by market data
As of January 2, 2009, the Company’s financial instruments were carried at fair value in the consolidated balance sheet. The fair value of the short-term financial instruments, including cash and cash equivalents, restricted cash, accounts receivable and unbilled revenue, accounts payable and accrued expenses and other liabilities, equaled the respective carrying value due to the short-term nature of these instruments.
As of January 2, 2009 and December 28, 2007, the Company had a net balance of $1.7 million and $7.0 million, respectively, in the Portfolio. The Portfolio units are no longer trading and, therefore, have little or no observable market data. The Company assessed the fair value of the Portfolio based on information available to the Company, the market outlook, and the expected timing of the remaining redemptions. The Company recorded a reserve of $450 thousand on the Portfolio in December 2007. As of January 2, 2009, the Company had $238 thousand of the reserve remaining. Based on the valuation methodology used to determine the fair value, the Company has categorized the Portfolio as a Level 3 financial asset.
The following table summarizes the Portfolio activity during the year ended January 2, 2009 (in thousands):
As of January 2, 2009, the Company had received 76% of its investment in the Portfolio at the date of liquidation for approximately $0.97 per share. Subsequent to January 2, 2009, the Company received an additional $0.3 million of cash redemptions at an average net asset value of $0.83. The Portfolio is continuing to accrue and pay interest which the Company is recording as interest income once the collection of the interest is certain. To the extent the Company determines there is a further change in fair value of the Portfolio, it may recognize additional losses in future periods.
5. Accounts Receivable and Unbilled Revenue, Net
Accounts receivable and unbilled revenue, net, consists of the following (in thousands):
Accounts receivable as of January 2, 2009 and December 28, 2007, is net of uncollected advanced billings. Unbilled revenue as of January 2, 2009 and December 28, 2007 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
6. Property and Equipment, net
Property and equipment, net, consists of the following (in thousands):
Depreciation expense for the years ended January 2, 2009, December 28, 2007 and December 29, 2006 was $2.1 million, $2.1 million and $2.5 million, respectively, and is included in selling, general and administrative costs on the accompanying consolidated statements of operations.
7. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following (in thousands):
8. Loan Payable
At January 2, 2009, December 28, 2007 and December 29, 2006, the Company did not have any outstanding loans. However, at December 30, 2005, the Company had a loan with a financial institution of $3.7 million, classified as short term borrowings. The loan was repaid in March 2006.
9. Letters of Credit
At January 2, 2009 and December 28, 2007, the Company had outstanding letters of credit totaling $600 thousand which secure the Company’s obligations on various operating leases. The Company had a total of $600 thousand deposited at January 2, 2009 and December 28, 2007 between two financial institutions which served as collateral for these letters of credit and has classified this deposit as restricted cash on the accompanying consolidated balance sheets.
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Lease Commitments
The Company has operating lease agreements for its premises that expire on various dates through December 2016. Rent expense, net of subleases for the years ended January 2, 2009, December 28, 2007 and December 29, 2006 was $1.8 million, $1.5 million and $1.3 million, respectively.
Future minimum lease commitments and sublease receipts under non-cancelable operating leases for premises having a remaining term in excess of one year at January 2, 2009 are as follows (in thousands):
11. Income Taxes
The Company files federal income tax returns, as well as multiple state, local and foreign jurisdiction tax returns. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution on any particular uncertain tax position, the Company believes that its reserves for income taxes reflect the most probable outcome. The Company adjusts these reserves, as well as the related interest, in light of changing facts and circumstances. The resolution of a matter would be recognized as an adjustment to the provision for income taxes and the effective tax rate in the period of resolution. The Company is no longer subject to examinations of its federal income tax returns by the Internal Revenue Service for years through 2003. All significant state, local and foreign matters have been concluded for years through 2003.
The components of income (loss) before income taxes are as follows (in thousands):
The components of income tax expense are as follows (in thousands):
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Income Taxes (continued)
A reconciliation of the federal statutory tax rate with the effective tax rate is as follows:
The recognition of the FIN No. 48 tax liabilities as of January 2, 2009 and December 28, 2007 of $768 thousand and $378 thousand, respectively, would have an impact on the effective tax rate.
The components of the net deferred income tax asset (liability) are as follows (in thousands):
As of January 2, 2009, the Company had $51.5 million of U.S. federal net operating loss carryforwards available for tax purposes, most of which expire in 2022 if not utilized. Additionally, at January 2, 2009, the Company had approximately $11.0 million of foreign net operating loss carryforwards, of which $3.7 million related to operations in the UK and $2.2 million related to operations in Germany. Most of the foreign net operating losses may be carried forward indefinitely.
In 2002, the Company discontinued its interactive marketing business which was acquired with THINK New Ideas. As a result, the Company claimed a worthless stock deduction for its investment in its 2002 tax return from which it was determined by the Internal Revenue Service that the Company was entitled to a worthless stock deduction of $77.3 million.
The liability method of accounting for deferred income taxes requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In determining the need for valuation allowances the Company considers evidence such as history of losses and general economic conditions. At January 2, 2009 and December 28, 2007, the Company had established a valuation allowance of $25.5 million and $31.6 million, respectively, to reduce deferred income tax assets primarily related to net operating loss carryforwards.
Penalties and tax-related interest expense are reported as a component of income tax expense. As of January 2, 2009 and December 28, 2007, the total amount of accrued income tax-related interest and penalties was $254 thousand and $241 thousand, respectively.
Effective December 30, 2006, the Company adopted FIN No. 48. FIN No. 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Income Taxes (continued)
As a result of the implementation of FIN No. 48, the Company performed a comprehensive review of its portfolio of uncertain tax positions in accordance with recognition standards established by FIN No. 48. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. As a result of this review, on December 30, 2006, the Company adjusted the estimated value of its uncertain tax positions by recognizing additional liabilities totaling $481 thousand through a charge to retained earnings, which primarily related to potential state and federal tax exposure. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.
The following table sets forth the detail and activity of the FIN No. 48 liability during the twelve months ended January 2, 2009 and December 28, 2007 (in thousands):
As of January 2, 2009, the FIN No. 48 liability of $768 thousand was classified as a current liability and included in the current portion of the accrued expenses and other liabilities in the accompanying consolidated balance sheet as of January 2, 2009.
12. Stock Based Compensation
Stock Plans
Total share based compensation included in net income for the year ended January 2, 2009 was $4.1 million. The number of shares available for future issuance under the plans as of January 2, 2009 were 9,758,950. The Company issues new shares as shares are required to be delivered under the plan.
Stock Options
The Company has granted stock options to employees and directors of the Company at exercise prices equal to the market value of the stock at the date of grant. The options generally vest ratably over four years, based on continued employment, with a maximum term of 10 years.
Stock option activity under the Company’s stock option plans for the year ended January 2, 2009 is summarized as follows:
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Stock Based Compensation (continued)
A summary of the Company’s stock option activity for the years ended December 28, 2007 and December 29, 2006 was as follows:
Other information pertaining to stock option activity during the years ended January 2, 2009, December 28, 2007 and December 29, 2006 was as follows (in thousands):
The following table summarizes information about the Company’s stock options outstanding as of January 2, 2009:
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Stock Based Compensation (continued)
Restricted Stock Units
Under the stock plans, participants may be granted restricted stock units, each of which represents a conditional right to receive a common share in the future. The restricted stock units granted under this plan generally vest over one of the following vesting schedules: (1) a four-year period, with 50% vesting on the second anniversary and 25% of the shares vesting on the third and fourth anniversaries of the grant date, (2) a four-year period, with 25% vesting on the first, second, third and fourth anniversary or (3) a three-year period with 33% vesting in on the first, second and third anniversary. Upon vesting, the restricted stock units will convert into an equivalent number of shares of common stock. The amount of expense relating to the restricted stock units is based on the closing market price of the Company’s common stock on the date of grant and is amortized on a straight-line basis over the applicable requisite service period. Restricted stock unit activity for the year ended January 2, 2009 was as follows:
The Company recorded restricted stock unit based compensation expense of $2.9 million and $3.5 million in 2008 and 2007, respectively, which is included in stock compensation expense, based on the vesting provisions of the restricted stock units and the fair market value of the stock on the grant date. As of January 2, 2009, there was $4.2 million of total restricted stock unit compensation expense related to the nonvested awards not yet recognized, which is expected to be recognized over a weighted average period of 2.16 years.
Common Stock Subject to Vesting Requirements
Shares of common stock subject to vesting requirements were issued to employees of REL. Employees of the acquired company vest in these shares over a period of three or four years. Compensation was based on the market value of the Company’s common stock at the time of grant and is recognized on a straight-line basis. Restricted stock activity for the year ended January 2, 2009 was as follows:
The recorded compensation expense totaling $290 thousand during the year ended January 2, 2009 related to common stock subject to vesting requirements. As of January 2, 2009, there was $405 thousand of total stock based compensation expense related to common stock subject to vesting requirements not yet recognized, which is expected to be recognized over a weighted average period of 1.22 years.
13. Shareholders’ Equity
Employee Stock Purchase Plan
Effective July 1, 1998, the Company adopted an Employee Stock Purchase Plan to provide substantially all employees who have completed three months of service as of the beginning of an offering period an opportunity to purchase shares of its common stock through payroll deductions. Purchases on any one grant are limited to 10% of eligible compensation. Shares of the Company’s common stock may be purchased by employees at six-month intervals at 95% of the fair market value on the last trading day of each six-month period. The aggregate fair market value, determined as of the first trading date of the offering period, of shares purchased by an employee may not exceed $25,000 annually. The Employee Stock Purchase Plan expires on July 1, 2018. A total of 4,275,000 shares of common stock are available for purchase under the plan with a limit of 400,000 shares of common stock to be issued per offering period. For plan years 2008, 2007 and 2006, 136,988 shares, 49,553 shares and 138,911 shares, respectively, were issued.
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Shareholders’ Equity (continued)
Treasury Stock
On July 30, 2002, the Company announced that its Board of Directors approved the repurchase of up to $5.0 million of the Company’s common stock. Since the inception of the repurchase plan, the Board of Directors approved the repurchase of an additional $50.0 million of the Company’s common stock, thereby increasing the total program size to $55.0 million. Under the repurchase plan, the Company may buy back shares of its outstanding stock from time to time either on the open market or through privately negotiated transactions, subject to market conditions and trading restrictions. As of January 2, 2009 and December 28, 2007, the Company had repurchased 14.4 million shares and 9.9 million shares of its common stock at an average price of $3.70 and $3.43 per share, respectively. As of January 2, 2009, the Company had approximately $2.0 million available under the Company’s buyback program. The Company holds repurchased shares of its common stock as treasury stock and accounts for treasury stock under the cost method.
Subsequent to January 2, 2009, the Board of Directors approved the repurchase of an additional $5.0 million of the Company’s common stock, thereby increasing the total program size to $60.0 million.
Shareholder Rights Plan
On February 13, 2004, the Company’s Board of Directors adopted a Shareholder Rights Plan. Under the Plan, a dividend of one preferred share purchase right (a “Right”) was declared for each share of common stock of the Company that was outstanding on February 26, 2004. Each Right entitles the holder to purchase from the Company one one-thousandth of a share of Series A Junior Preferred Stock at a purchase price of $32.50, subject to adjustment.
The Rights will trade automatically with the common stock and will not be exercisable until a person or group has become an “acquiring person” by acquiring 15% or more of the Company’s outstanding common stock, or a person or group commences, or publicly announces a tender offer that will result in such a person or group owning 15% or more of the Company’s outstanding common stock. However, Liberty Wanger Asset Management, L.P. (now known as Columbia Wanger Asset Management, L.P.), together with its affiliates and associates will be permitted to acquire up to 20% of the common stock without making the rights exercisable. Upon announcement that any person or group has become an acquiring person, each Right will entitle all rightholders (other than the acquiring person) to purchase, for the exercise price of $32.50, a number of shares of the Company’s common stock having a market value equal to twice the exercise price. Rightholders would also be entitled to purchase common stock of the acquiring person having a value of twice the exercise price if, after a person had become an acquiring person, the Company were to enter into certain mergers or other transactions. If any person becomes an acquiring person, the Board of Directors may, at its option and subject to certain limitations, exchange one share of common stock for each Right.
The Rights have certain anti-takeover effects, in that they would cause substantial dilution to a person or group that attempts to acquire a significant interest in the Company on terms not approved by the Board of Directors. In the event that the Board of Directors determines a transaction to be in the best interests of the Company and its shareholders, the Board of Directors may redeem the Rights for $0.001 per share at any time prior to a person or group becoming an acquiring person. The Rights will expire on February 13, 2014.
14. Benefit Plan
The Company maintains a 401(k) plan covering all eligible employees. Subject to certain dollar limits, eligible employees may contribute up to 15% of their pre-tax annual compensation to the plan. The Company may make discretionary contributions on an annual basis. During fiscal years 2008, 2007 and 2006, the Company made matching contributions of 25% of employee contributions up to 4% of their gross salaries. The Company’s matching contributions were $0.3 million in each of the fiscal years ended January 2, 2009, December 28, 2007 and December 29, 2006.
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Restructuring Costs
The Company recorded restructuring costs of $10.9 million and $5.6 million in fiscal years 2002 and 2001, respectively, for reductions in consultants and functional support personnel and for the closure and consolidation of facilities and related exit costs. These actions were taken as a result of the continued decline in demand for technology services throughout 2001 and 2002. The Company took steps to reduce its costs to better align its overall cost structure and organization with anticipated demand for its services.
In 2004 and 2003, the Company recorded restructuring costs of $3.7 million and $4.9 million, respectively, to increase existing reserves to account for potentially higher estimated losses on the sublease of facilities as a result of lower than expected sublease rates and longer than expected time estimates to sublease excess facilities. The 2004 and 2003 restructuring costs consisted of additions of $1.8 million and $3.1 million, respectively, to the 2002 restructuring accrual and $1.9 million and $1.8 million, respectively, to the 2001 restructuring accrual. Also in 2004, the 2002 restructuring accrual was reduced by $370 thousand relating to the final settlement of a lease obligation which was recorded as income from discontinued operations in the consolidated statement of operations for year ended December 31, 2004.
In 2005, the Company recorded restructuring costs of $2.9 million which related to $1.1 million for the consolidation of additional facilities and related exit costs not included in previously established reserves, primarily as a result of the REL acquisition on November 29, 2005, and $1.8 million for increases in previously established reserves in 2002 and 2001 for the closure and consolidation of facilities, of which $1.1 million is specifically related to the increase of previously established reserves in order to reflect the negotiated buyout of our New York City lease obligation. As a result of the buyout, the Company was fully released from $20.0 million of future lease obligations, assigned two subleases to the lessor, wrote-off $1.4 million receivable from the lessor, and paid $3.1 million in cash to the lessor. The remaining $700 thousand related to increases in the reserves to account for higher estimated losses on the sublease of facilities as a result of lower than expected sublease rates and longer than expected times estimates to sublease facilities based on current market conditions. The 2005 restructuring costs of $1.8 million related to previously established reserves consisted of additions of $1.2 million and $600 thousand to the 2002 and 2001 restructuring accruals, respectively.
In 2006, the Company recorded restructuring costs of $6.3 million, which was comprised of $2.8 million relating to the 2005 restructuring for the consolidation of additional facilities and related exit costs primarily as a result of the REL acquisition and $3.5 million for increases in previously established reserves in 2002 and 2001 for the closure and consolidation of facilities to account for higher estimated losses on the sublease of facilities as a result of lower than expected sublease rates and longer than expected time estimates to sublease facilities based on current market conditions. Included in the $2.8 million is a further reduction of occupied space in our technology focused facility in Philadelphia and related severance costs for a senior executive as the Company’s primary business model shifted to a proprietary best practice and intellectual capital and strategic advisory services firm.
No restructuring costs were incurred in 2008 or 2007.
The following tables set forth the detail and activity in the restructuring expense accruals (in thousands):
2001 Restructuring Accrual
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Restructuring Costs (continued)
2002 Restructuring Accrual
2005 Restructuring Accrual
16. Transactions with Related Parties
In connection with the Company’s repurchase of common stock in 2008 and 2007, the Board of Directors approved the Company’s buy back of 190,640 shares and 276,654 shares, respectively, of outstanding common stock from members of the Company’s management team and Board of Directors at an average price of $5.40 per share and $4.19 per share, respectively. These shares were included in the Company’s treasury stock on the accompanying consolidated balance sheets at January 2, 2009 and December 28, 2007.
17. 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.
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Geographic and Service Group Information
Revenue is attributed to geographic areas as follows (in thousands):
Long-lived assets are attributed to geographic areas as follows (in thousands):
As of January 2, 2009, foreign assets included $13.6 million of goodwill and intangible assets related to the REL acquisition.
The Company’s revenue is derived from the following service groups (in thousands):
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Quarterly Financial Information (unaudited)
The following table presents unaudited supplemental quarterly financial information for the years ended January 2, 2009 and December 28, 2007 (in thousands, except per share data):
Quarterly basic and diluted net income (loss) per common share were computed independently for each quarter and do not necessarily total to the year to date basic and diluted net income (loss) per common share.
THE HACKETT GROUP, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED JANUARY 2, 2009, DECEMBER 28, 2007 AND DECEMBER 29, 2006
(in thousands)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness 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 (the Exchange Act). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the three months ended January 2, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission as of and for the year ended January 2, 2009. Based on our evaluation under the framework in “Internal Control - Integrated Framework,” our management concluded that our internal control over financial reporting was effective as of the end of the period covered by this annual report.
Our management’s assessment of the effectiveness of our internal control over financial reporting as of the end of the period covered by this annual report, has been audited by BDO Seidman, LLP, an independent registered certified public accounting firm, as stated in their report which is included herein.
Report of Independent Registered Certified Public Accounting Firm
Board of Directors and Shareholders
The Hackett Group, Inc.
Miami, Florida
We have audited The Hackett Group, Inc.’s internal control over financial reporting as of January 2, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Hackett Group, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Control and Procedures - Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, The Hackett Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 2, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The Hackett Group, Inc. as of January 2, 2009 and December 28, 2007 and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended January 2, 2009 and our report dated March 18, 2009 expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
Miami, Florida
March 18, 2009
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information responsive to this Item is incorporated herein by reference to the Company’s definitive 2009 Proxy Statement for the 2009 Annual Meeting of Shareholders.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information responsive to this Item is incorporated herein by reference to the Company’s definitive 2009 Proxy Statement for the 2009 Annual Meeting of Shareholders.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
Information responsive to this Item is incorporated herein by reference to the Company’s definitive 2009 Proxy Statement for the 2009 Annual Meeting of Shareholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information responsive to this Item is incorporated herein by reference to the Company’s definitive 2009 Proxy Statement for the 2009 Annual Meeting of Shareholders.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information appearing under the caption “Fees Paid to Independent Accountants” in the 2009 Proxy Statement is hereby incorporated by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this Form:
1. Financial Statements
The Consolidated Financial Statements filed as part of this report are listed and indexed on page 26. Schedules other than those listed in the index have been omitted because they are not applicable or the required information has been included elsewhere in this report.
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts and Reserves are included in this report. Schedules other than those listed in the index have been omitted because they are inapplicable or the information required to be set forth therein is contained, or incorporated by reference, in the Consolidated Financial Statements of The Hackett Group, Inc. or notes thereto.
3. Exhibits: See Index to Exhibits on page 54
The Exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Miami, State of Florida, on March 18, 2009.
THE HACKETT GROUP, INC.
By:
/s/ Ted A. Fernandez
Ted A. Fernandez
Chief Executive Officer and Chairman
Pursuant to the requirements of the Securities Act of 1934, this Form 10-K has been signed by the following persons on behalf of the Registrant in the capacities and on the date indicated.
INDEX TO EXHIBITS