Hackett Group, Inc.: Form 10-Q for the period ended Apr 2, 2021

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements. All statements regarding our expected financial position and operating results, our business strategy, our financing plans and forecasted demographic and economic trends relating to our industry are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as “may,” “will,” “anticipate,” “estimate,” “expect,” or “intend” and similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. We cannot promise you that our expectations reflected in such forward-looking statements will turn out to be correct. Factors that could impact such forward-looking statements include, among others, the impact of the coronavirus (COVID-19) pandemic and changes in worldwide and U.S. economic conditions that impact business confidence and the demand for our products and services, our ability to mitigate or manage disruptions posed by the COVID-19 pandemic, 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 Brexit on our business and changes in general economic conditions, interest rates and our ability to obtain additional debt financing if needed. For a discussion of risks and actions taken in response to the COVID-19 pandemic, see “Our results of operations have been adversely affected and could in the future be materially adversely impacted by the coronavirus pandemic (COVID-19)” under Item 1A, “Risk Factors” of our Annual Report on Form 10-K. An additional description of our risk factors is described in Part I – Item 1A, “Risk Factors”. 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. Many of the risks, uncertainties and other factors identified in our Annual Report on Form 10-K for the year ended January 1, 2021 have been amplified by the COVID-19 pandemic.

OVERVIEW

The Hackett Group, Inc. (“Hackett” or the “Company”) is a leading IP-based strategic advisory and technology consulting firm that enables companies to achieve world-class business performance. By leveraging the comprehensive Hackett database, the world’s leading repository of enterprise business process performance metrics and best practice intellectual capital, our business and technology solutions help clients improve performance and maximize returns on technology investments. Only Hackett empirically defines world-class performance in sales, general and administrative and certain supply chain activities with analysis gained through nearly 20,000 benchmark and performance studies over 27 years at over 7,000 of the world’s leading companies.

In the following discussion, Strategy and Business Transformation Group includes the results of our North America IP as-a-service offerings, which include our Executive Advisory Programs and Benchmarking Services, and our Business Transformation Practices (S&BT). ERP, EPM and Analytics Solutions includes the results of our North America Oracle EEA and SAP Solutions Practices (EEA). International includes results of our S&BT and EEA Practices primarily in Europe.

COVID-19 Pandemic Impact 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. Despite the disruption beginning in March 2020, the COVID-19 pandemic did not have a significant impact on our consolidated results of operations during the first quarter of 2020. However, our net revenue and diluted earnings per share were negatively impacted for the remainder of 2020, due to adverse economic conditions as a result of the COVID-19 pandemic. In the first quarter of 2021, our net revenue and diluted earnings per share grew when compared to the fourth quarter of 2020, reflecting a continuation of improved economic conditions. We expect negative impacts to our net revenue and diluted earnings per share to continue in 2021 until economic conditions fully recover. However, any reversal of these trends or a prolonged economic downturn as a result of the COVID-19 pandemic or otherwise, weak or uncertain economic conditions or similar factors could adversely affect our clients’ financial condition which may further reduce our clients’ demand for our services.

We are actively managing our business to respond to the impact of the COVID-19 pandemic. We have reduced employee headcount and employee travel to only essential business needs and most of our employees have been working remotely from home. We are generally following the requirements and protocols published by the U.S. Centers for Disease Control and the World Health Organization, and state and local governments. We cannot predict when or how we will begin to lift the actions put in place.

As a response to the ongoing COVID-19 pandemic, we have implemented plans to manage our costs and preserve cash. We have significantly limited the addition of new employees and third party contracted services, eliminated all travel except where necessary to meet customer needs, and limited discretionary spending. At the end of June 2020, we reduced our global workforce by approximately 10% and recorded a $5.0 million restructuring charge. During the fourth quarter of 2020, as a result of and in consideration of the COVID-19 pandemic, and the changing nature of our use of office space for its workforce, we evaluated our existing office leases as part of our transformation initiatives related to real estate. This evaluation resulted in the complete and partial abandonment of certain leased office spaces and an asset impairment charge of $3.9 million for certain lease right-of-use assets and certain property, equipment and leasehold improvements. All client concessions and accounts receivable allowances have been appropriately reflected in our financial statements. To the extent the business disruption continues for an extended period, additional cost management actions will be considered. Future asset impairment charges, increases in allowance for doubtful accounts, or restructuring charges will be dependent on the severity and duration of the COVID-19 pandemic.

In light of the evolving health, social, economic and business environment, governmental regulations or mandates, and business disruptions that could occur, the potential impact that the COVID-19 pandemic could have on our financial condition and operating results remains highly uncertain.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, our results of operations and the percentage relationship to revenue before reimbursements of such results (in thousands and unaudited):

Revenue. We are a global company with operations 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 first quarter of 2021 and the comparable period of 2020. Revenue is analyzed based on geographical location of engagement team personnel.

The following table sets forth revenue by group for the periods indicated (in thousands):

Our total Company net revenue from continuing operations, or revenue before reimbursements, decreased 3%, to $63.4 million in the first quarter of 2021, as compared to $65.2 million in the same period of 2020. Our North America revenue before reimbursements was $57.9 million in the first quarter of 2021, as compared to $57.7 million in the first quarter of 2020. Net revenue and reimbursable expenses were both affected from the economic disruption of the COVID-19 pandemic and as we transitioned to a remote service delivery model throughout the U.S. and Europe. In the first quarter of 2021 and 2020, no customer accounted for more than 5% of our total revenue.

S&BT net revenue was $25.7 million during the first quarter of 2021, as compared to $25.6 million in the same period of 2020, due to the improved demand experienced since the end of the second quarter of 2020.

EEA net revenue was $32.1 million during both the first quarter of 2021 and 2020, primarily driven by the improving demand in our SAP S4 Hana implementation practice, as well as our OneStream and Oracle ERP practices.

Hackett international net revenue from continuing operations decreased 26% in the first quarter of 2021, as compared to the same period in 2020, as Europe continues to be impacted by lengthened client decision-making from economic uncertainty which has been further impacted by the COVID-19 pandemic. Total Company international net revenue accounted for 9% and 12% of total Company net revenue during both the first quarters of 2021 and 2020, respectively.

Reimbursements as a percentage of total net revenue were 0.1% and 7% during the first quarters of 2021 and 2020, respectively. Reimbursements are project travel-related expenses passed through to a client with no associated margin. The decline in reimbursements is directly attributable to the decreases in travel requirements resulting from the COVID-19 pandemic.

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

Personnel costs decreased 4%, to $39.3 million, for the first quarter of 2021 from $41.1 million in the same period of 2020. The decrease was primarily a result of cost savings initiatives achieved from our restructuring actions in 2020. Personnel costs before reimbursable expenses, as a percentage of revenue before reimbursements, were 62% for the first quarter of 2021 and 63% for the first quarter of 2020.

Non-cash stock compensation expense was $1.6 million for the first quarter of 2021, as compared to $1.3 million for the same period of 2020. This increase was primarily driven by a new retention-based non-cash incentive compensation program effective in 2020 for our key practice leaders. Historically, annual performance grants are amortized over a three-year vesting period after the performance year. However, due to competitive market conditions for these key employees, a program change was effected whereby 50% of their annual performance stock opportunity was granted based on the achievement of certain non-financial objectives and the grants vest at the end of the performance year, assuming the objectives were met.

Acquisition related non-cash stock compensation expense in 2021 and 2020 primarily related to equity issued in relation to acquisitions.

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 compensation expense, amortization of intangible assets, acquisition related costs and various other overhead expenses.

SG&A costs decreased 11% to $12.4 million for the first quarter of 2021, as compared to $13.9 million for the same period in 2020. This decrease is primarily due to decreased travel-related selling and marketing activities due to the transition to virtual sales and delivery models resulting from the COVID-19 pandemic. These SG&A costs as a percentage of revenue before reimbursements were 20% and 21% during the first quarters of 2021 and 2020, respectively.

Amortization expense was $0.3 million in the first quarter of 2021, as compared to $0.2 million in the same period in 2020. The amortization expense relates to the amortization of the intangible asset acquired in our acquisitions and the buyout of our partner’s joint venture interest in the CGBS Training and Certification Programs in 2017. The intangible assets related to the acquisitions will continue to amortize until 2022 and the intangible assets related to the joint venture will continue to amortize through September 2021.

Income Taxes. During the first quarter of 2021, we recorded $2.5 million of income tax expense related to certain federal, foreign and state taxes which reflected an effective tax rate of 28%. In the first quarter of 2020, we recorded $2.1 million of income tax expense related to certain federal, foreign and state taxes which reflected an effective tax rate of 28%.

Liquidity and Capital Resources

As of April 2, 2021, and January 1, 2021, we had $51.1 million and $49.5 million, respectively, classified in cash on the consolidated balance sheets. We currently believe that available funds (including the cash on hand and funds available for borrowing capacity under our credit facility) and cash flows generated by operations will be sufficient to fund our working capital and capital expenditure requirements for at least the next twelve months. We may decide to raise additional funds in order to fund expansion, to develop new or further enhance products and services, to respond to competitive pressures, or to acquire complementary businesses or technologies. There is no assurance that additional financing would be available when needed or desired.

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

Cash Flows from Operating Activities

Net cash provided by operating activities was $5.9 million during the first three months of 2021, as compared to $6.5 million during the same period in 2020. In 2021, the net cash provided by operating activities was primarily due to net income adjusted for non-cash items and an increase in income taxes payable, partially offset by an increase in accounts receivable and contract assets and a decrease in accounts payable. In 2020, the net cash provided by operating activities was primarily due to net income adjusted for non-cash items, partially offset by an increase in accounts receivable and contract assets.

Cash Flows from Investing Activities

Net cash used in investing activities was $0.5 million during the both the first three months of 2021 and 2020. During both periods, cash flows used in investing activities was primarily driven by investments related to the development of our Quantum Leap benchmark technologies.

Cash Flows from Financing Activities

Net cash used in financing activities was $3.7 million and $8.8 million during 2021 and 2020, respectively. The usage of cash in 2021 primarily related to the repurchase of $3.7 million of the Company’s common stock. The usage of cash in 2020 was primarily related to the dividend payment of $5.8 million and the repurchase of $3.0 million of the Company’s common stock.

As of April 2, 2021, we did not have any outstanding borrowings under our revolving line of credit (the “Revolver”), leaving us with a capacity of approximately $45.0 million. See Note 7, “Credit Facility,” to our consolidated financial statements included in this Quarterly Report on Form 10-Q for more information.

Recently Issued Accounting Standards

For a discussion of recently issued accounting standards, see Note 1, “Basis of Presentation and General Information,” to our consolidated financial statements included in this Quarterly Report on Form 10-Q and Note 1, “Basis of Presentation and General Information,” to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 1, 2021.

As of April 2, 2021, 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 Revolver, which is subject to variable interest rates. The interest rates per annum applicable to loans under the Revolver will be, at our option, equal to either a base rate or a LIBOR rate for one-, two-, three- or nine-month interest periods chosen by us in each case, plus an applicable margin percentage. A 100-basis point increase in our interest rate under our Revolver would not have had a material impact on our results of operations for the quarter ended April 2, 2021.

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 Controls

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 January 1, 2021 (the “Annual Report”).

There have been no material changes to any of the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended January 1, 2021.