Hackett Group, Inc.: Form 10-Q for the period ended Jun 28, 2024

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All statements regarding our expected financial position and operating results, our business strategy, our financing plans and forecasted demographic and economic trends relating to our industry are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as “may,” “will,” “anticipate,” “estimate,” “expect,” or “intend” and similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. We cannot promise you that our expectations reflected in such forward-looking statements will turn out to be correct. Factors that could impact such forward-looking statements include, among others, changes in worldwide and U.S. economic conditions that impact business confidence and the demand for our products and services, our ability to effectively integrate acquisitions into our operations, our ability to retain existing business, our ability to attract additional business, our ability to effectively market and sell our product offerings and other services, the timing of projects and the potential for contract cancellation by our customers, changes in expectations regarding the business consulting and information technology industries, our ability to attract and retain skilled employees, possible changes in collections of accounts receivable due to the bankruptcy or financial difficulties of our customers, risks of competition, price and margin trends, foreign currency fluctuations, the impact of the geopolitical conflict involving Russia and Ukraine and in the Middle East on our business and changes in general economic conditions, interest rates and our ability to obtain additional debt financing if needed. An additional description of our risk factors is described in Part I – Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 29, 2023. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

OVERVIEW

The following Management's Discussion and Analysis ("MD&A") is intended to help the reader understand the results of operations and financial condition of Hackett. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to our consolidated financial statements included in this Quarterly Report on Form 10-Q.

Hackett is a global IP-based executive advisory, strategic consulting and digital transformation firm. The Hackett Group provides dedicated expertise in Generative Artificial Intelligence ("Gen AI") strategy, operations, finance, human capital management, strategic sourcing, procurement, and information technology, including its highly recognized Oracle, SAP, OneStream and Coupa implementation offerings.

The firm recently launched its AI XPLR offering which helps define an organizations’ Gen AI enablement opportunities. Using AI XPLR, our artificial intelligence ("AI") assessment platform, our experienced professionals guide organizations to harness the power of Gen AI to digitally transform their operations and seek to achieve quantifiable, breakthrough results, allowing us to be key architects of our clients' Gen AI journey.

The Hackett Group has completed over 26,600 benchmarking and performance studies with major organizations. These studies are executed utilizing our Quantum Leap ("QL") platform which drives our Digital Transformation Platform ("DTP"). This includes the firm's benchmarking metrics, best practices repository, and best practice configuration and process flow accelerators, which enables our clients and partners to achieve digital world-class performance.

Our expertise is grounded in best practices insights from benchmarking the world’s leading businesses – including companies comprising 97% of the Dow Jones Industrial Average, 89% of the Fortune 100, 70% of the DAX 40 and 55% of the Financial Times Stock Exchange 100 Index, which are delivered through our Hackett Connect, QL and DTP platforms.

Impact of Macroeconomic Conditions on Our Business

The level of revenue we achieve is based on our ability to deliver market leading services and solutions and to deploy skilled teams of professionals quickly. Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business confidence. Any deterioration in the current macroeconomic environment or economic downturn as a result of weak or uncertain economic conditions due to inflation, high interest rates, national or geopolitical events or other factors impacting economic activity or business confidence could adversely affect our clients' financial condition or outlook which may reduce the clients' demand for our services.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, our results of operations (in thousands and unaudited):

Revenue. We are a global Company with operations in our primary markets located in the United States and Western Europe. Our revenue is denominated in multiple currencies, primarily the U.S. Dollar, British Pound and Euro, and as a result is affected by currency exchange rate fluctuations. The impact of currency fluctuations did not have a significant impact on comparisons between the second quarter and first six months of 2024 and the same comparable periods of 2023. In this MD&A, we discuss revenue based on geographical location of engagement team personnel.

Our Company total revenue was $77.7 million and $154.8 million during the second quarter and first six months of 2024, respectively, as compared to $77.1 million and $148.3 million in the same periods in 2023, respectively. In the second quarter and first six months of 2024, one customer accounted for 13% and 11%, respectively, of our total revenue. In both the second quarter and first six months of 2023, one customer accounted for 5% of our total Company revenue.

Segment revenue. The Company has three reportable segments: Global Strategy & Business Transformation (Global S&BT), Oracle Solutions and SAP Solutions. Global S&BT includes S&BT Consulting, Benchmarking, Business Advisory Services, Intellectual Property as-a-Service (IPASS) and OneStream offerings. Oracle Solutions and SAP Solutions support the two fundamentally distinct ERP systems: Oracle and SAP.

The following table sets forth total revenue by operating segment, which includes reimbursable expenses related to project travel-related expenses passed through to a client with no associated operating margin (in thousands):

Global S&BT total revenue was $42.3 million and $83.2 million during the second quarter and first six months of 2024, respectively, as compared to $43.6 million and $86.0 million in the same periods of 2023, respectively. This segment has been impacted by extended client decision making in our business transformation engagements, particularly impacting our e-procurement offerings.

Oracle Solutions total revenue was $23.0 million and $44.8 million during the second quarter and first six months of 2024, respectively, as compared to $20.8 million and $37.9 million in the same periods of 2023, respectively. The segment has continued the momentum it has experienced since the second quarter of 2023, with significant growth over the last five quarters when compared to prior year periods.

SAP Solutions total revenue was $12.3 million and $26.9 million during the second quarter and first six months of 2024, respectively, as compared to $12.7 million and $24.4 million in the same periods of 2023, respectively. The increase in revenue during the first six months of 2024, as compared to the same period in 2023, was due to the very strong value-added reseller activity in the first half of 2024.

Reimbursements as a percentage of Company total revenue were 2% during both the second quarter and first six months of 2024 and 2023. Reimbursements are project travel-related expenses passed through to a client with no associated operating margin.

Cost of Service. Cost of service consists of personnel costs before reimbursable expenses, which includes salaries, benefits and incentive compensation for consultants and subcontractor fees, acquisition-related non-cash stock based compensation expense and non-cash stock based compensation expense, and reimbursable expenses which are travel and other expenses passed through to a client and are associated with projects.

Personnel costs before reimbursable expenses were $45.4 million and $91.2 million for the second quarter and first six months of 2024, respectively, as compared to $45.4 million and $88.6 million in the same periods of 2023, respectively. The higher costs in the first six months of 2024 were primarily a result of increased salaries and higher utilization of subcontractors. Personnel costs as a percentage of total Company total revenue were 58% and 59% during the second quarter and first six months of 2024 and 59% and 60% for the same periods in 2023, respectively.

Non-cash stock based compensation expense, included in personnel costs before reimbursable expenses was $1.6 million and $3.0 million during the second quarter and first six months of 2024, respectively, as compared to $1.6 million and $3.2 million in the same periods of 2023, respectively.

Selling, General and Administrative Costs (“SG&A”). SG&A primarily consists of salaries, benefits and incentive compensation for the selling, marketing, administrative and executive employees, non-cash stock based compensation expense and various other overhead expenses.

SG&A costs increased 3%, to $18.0 million, and 11%, to $36.3 million, for the second quarter and first six months of 2024, respectively, as compared to $17.4 million and $32.9 million for the same periods in 2023, respectively. This increase in the costs during the second quarter and first six months of 2024 was primarily due to the incremental investments we are making in program development and additional dedicated sales resources for Benchmark, Executive Advisory Market Intelligence and our other IP as-a-service offerings. SG&A costs as a percentage of total Company revenue were 23% during both the second quarter and first six months of 2024, respectively, as compared to 23% and 22% during the same periods in 2023, respectively.

Non-cash stock based compensation expense, included in SG&A, was $1.2 million and $2.4 million during the second quarter and first six months of 2024, respectively, as compared to $1.1 million and $2.1 million for the same periods in 2023, respectively.

Segment Profit. Segment profit consists of the revenue generated by the segment, less the direct costs of revenue and selling, general and administrative expenses that are incurred directly by the segment. Items not allocated to the segment level include corporate costs related to the administrative functions that are performed in a centralized manner and that are not attributable to a particular segment. These administrative function costs include corporate general and administrative expenses, non-cash compensation, depreciation expense, interest expense and legal settlement and related costs.

Global S&BT segment profit was $12.7 million and $22.8 million during the second quarter and first six months of 2024, respectively, as compared to $13.1 million and $26.9 million for the same periods in 2023, respectively. This decrease was primarily due to the incremental investments we are making in program development and additional dedicated sales resources for Benchmark, Executive Advisory Market Intelligence and our other IP as-a-service offerings.

Oracle Solutions segment profit was $5.4 million and $10.6 million during the second quarter and first six months of 2024, respectively, as compared to $5.9 million and $8.9 million for the same periods in 2023, respectively. The increase during the second quarter and first six months of 2024 was primarily due to higher revenue, partially offset by increased headcount and increased usage of subcontractors.

SAP Solutions segment profit was $3.3 million and $8.1 million during the second quarter and first six months of 2024, respectively, as compared to $3.0 million and $5.6 million for the same periods in 2023, respectively. The increase in segment profit in the first six months of 2024, as compared to the same period in 2023, was primarily due to the value-added reseller activity in the quarter.

Legal Settlement and Related Costs. In May 2023, Gartner, Inc. ("Gartner") filed a lawsuit seeking a preliminary injunction and damages against the Company and two ex-Gartner employees that were hired by us. On February 17, 2024, we, Gartner and the two ex-Gartner employees entered into a settlement agreement whereby we made a settlement payment of $985,000 to Gartner in exchange for a dismissal of the lawsuit and a release of all claims which is reflected in our Consolidated Statement of Operations for the year ended December 29, 2023. In addition, we incurred incremental legal costs related to the settlement which were recorded as expense in the period incurred.

Interest Expense, Net. Interest expense, net was $0.5 million and $1.0 million during the second quarter and first six months of 2024, respectively, as compared to $0.9 million and $1.8 million in the same periods in 2023, respectively. As of June 28, 2024, we had outstanding debt of $27.0 million, excluding debt issue costs. As of June 30, 2023, we had outstanding debt of $53.0 million, excluding debt issue costs.

Income Taxes. During the second quarter and first six months of 2024, we recorded $3.3 million and $5.6 million of income tax expense, respectively, related to certain federal, foreign and state taxes which reflected an effective tax rate of 27.1% and 24.2%, respectively. During the second quarter and first six months of 2023, we recorded $3.1 million and $5.4 million of income tax expense, respectively, related to certain federal, foreign and state taxes which reflected an effective tax rate of 26.5% and 24.2%, respectively.

Liquidity and Capital Resources

As of June 28, 2024 and December 29, 2023, we had $19.1 million and $21.0 million, respectively, classified as cash on the consolidated balance sheets. We currently believe that available funds (including the cash on hand and funds available for borrowing under our revolving line of credit the "Credit Facility") and cash flows generated by operations will be sufficient to fund our working capital requirements, including debt payments, lease obligations and capital expenditures for at least the next twelve months and beyond. We may decide to raise additional funds in order to fund expansion, to develop new or further enhance products and services, to respond to competitive pressures, or to acquire complementary businesses or technologies. There is no assurance that additional financing would be available when needed or desired. Our cash requirements have not changed materially from those disclosed in Item 7 included in Part II of our Annual Report on Form 10-K for the year ended December 29, 2023.

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

Cash Flows from Operating Activities

Net cash provided by operating activities was $16.5 million during the first six months of 2024, as compared to $4.7 million during the same period in 2023. In 2024 and 2023, the net cash provided by operating activities was primarily due to net income adjusted for non-cash items and an increase in contract liabilities, partially offset by increases in accounts receivable and contract assets, decreases in accrued liabilities and other accruals primarily due to payments of the prior year earned incentive compensation liabilities and payments to vendors.

Cash Flows from Investing Activities

Net cash used in investing activities was $1.8 million during the first six months of 2024, as compared to $2.1 million during the same period in 2023. During both periods, cash flows used in investing activities primarily related to investments for the continued development of our Hackett Connect Executive Advisory member platform, our Quantum Leap benchmark and Digital Transformation technologies.

Cash Flows from Financing Activities

Net cash used in financing activities was $16.5 million and $16.9 million during the first six months of 2024 and 2023, respectively. The usage of cash in 2024 primarily related to the repurchase of $5.0 million of the Company's common stock, dividend payments of $6.0 million and the repayment of borrowings of $6.0 million related to our Credit Facility. The usage of cash in 2023 primarily related to the net repayment of borrowings of $7.0 million related to our Credit Facility, dividend payments of $6.0 million and the repurchase of $4.4 million of the Company's common stock.

As of June 28, 2024, we had $27.0 million of outstanding borrowings under our Credit Facility, excluding deferred debt costs, leaving us with a capacity of approximately $73.0 million.

As of June 28, 2024, our exposure to market risk related primarily to changes in interest rates and foreign currency exchange rate risks.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to the Credit Facility, which is subject to variable interest rates. Under our credit agreement, the interest rates per annum applicable to loans under the Credit Facility was, at our option, equal to a base rate for one-, two-, three- or nine-month interest periods chosen by us in each case, plus an applicable margin percentage. A 100-basis point increase in our interest rate under our Credit Facility would not have had a material impact on our results of operations for the quarter and six months ended June 28, 2024.

Exchange Rate Sensitivity

We face exposure to adverse movements in foreign currency exchange rates as a portion of our revenue, expenses, assets and liabilities are denominated in currencies other than the U.S. Dollar, primarily the British Pound, the Euro and the Australian Dollar. These exposures may change over time as business practices evolve.

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

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

For a discussion of our potential risks and uncertainties, see the risk factor below and the information under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 29, 2023.

There have been no material changes to any of the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 29, 2023.