THE HACKETT GROUP, INC. 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 andU.S. economic conditions that impact business confidence and the demand for our products and services, the impact of the coronavirus (COVID-19) pandemic and our ability to mitigate or manage disruptions posed by 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 the geopolitical conflict involvingRussia andUkraine on our business and changes in general economic conditions, inflation, 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 endedDecember 31, 2021 have been amplified by the COVID-19 pandemic.
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.
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.
Impact of Macroeconomic Conditions on Our Business
The level of revenue we achieve is based on its 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. In each of
the four quarters of 2021, our revenue before reimbursements and diluted
earnings per share grew when compared to the fourth quarter of 2020 reflecting a
continuation of improved economic conditions since 2021. However, any reversal
of these trends or a prolonged economic downturn as a result of the impact of
COVID-19 variants, or otherwise, weak or uncertain economic conditions or
similar factors could adversely affect our clients' financial condition which
may further reduce the clients' demand for our services.
18
--------------------------------------------------------------------------------RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, our results of operations (in thousands and unaudited):
Quarter Ended Nine Months Ended
September 30, October 1, September 30, October 1,
2022 2021 2022 2021Revenue:
Revenue before reimbursements$ 70,995 $ 71,400 $ 220,871 $ 207,807 Reimbursements 1,038 494 2,754 770 Total revenue 72,033 71,894 223,625 208,577 Costs and expenses: Cost of service: Personnel costs before reimbursable expenses (includes$1,652 and$4,801 and$1,670 and$5,296 of non-cash stock based compensation expense in the three and nine months endedSeptember 30, 2022 and October 1, 2021, respectively) 42,870 45,222 134,904 129,619 Reimbursable expenses 1,038 494 2,754 770 Total cost of service 43,908 45,716 137,658 130,389 Selling, general and administrative costs (includes$859 and$3,027 and$901 and$2,515 of non-cash stock based compensation expense in the three and nine months endedSeptember 30, 2022 and October 1, 2021, respectively) 14,616 14,773 44,993 43,713 Restructuring charge reversal (526 ) - (651 ) - Total costs and operating expenses 57,998 60,489 182,000 174,102 Income from operations 14,035 11,405 41,625 34,475 Other expense: Interest expense (14 ) (26 ) (70 ) (76 ) Income from continuing operations before income taxes 14,021 11,379 41,555 34,399 Income tax expense 3,655 3,248 10,469 9,368 Income from continuing operations 10,366 8,131 31,086 25,031 Loss from discontinued operations - - - (7 ) Net income$ 10,366 $ 8,131 $ 31,086 $ 25,024 Diluted net income per common share$ 0.32 $ 0.25
Revenue. We are a global company with operations in our primary markets located inthe United States andWestern Europe . Our revenue is denominated in multiple currencies, primarily theU.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 third quarter and first nine months of 2022 and the comparable periods of 2021. In this MD&A, we discuss revenue based on geographical location of engagement team personnel. Our Company total revenue was$72.0 million in the third quarter of 2022, as compared to$71.9 million in the same period of 2021 and increased 7% in the first nine months of 2022 to$223.6 million , as compared to$208.6 million in the same period of 2021. In the third quarter and first nine months of 2022, one customer accounted for 7% of our total Company revenue. In the third quarter of 2021 and in the first nine months of 2021 no customer accounted for more than 5% of our total Company revenue. Segment revenue. Effective in the third quarter of 2022, the Company reorganized its operating and internal reporting structure to better align with its primary market solutions. Due to the reorganization, management made the determination to present three reportable segments: Global Strategy & Business Transformation (Global S&BT), Oracle Solutions and SAP Solutions. Global S&BT includesS&BT Consulting , Benchmarking, Business Advisory Services, Intellectual Property as-a-Service (IPASS) and OneStream. Oracle Solutions and SAP Solutions support the two fundamentally distinct ERP systems: Oracle and SAP. 19 --------------------------------------------------------------------------------
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):
Quarter Ended Nine Months Ended
September 30, October 1, September 30, October 1,
2022 2021 2022 2021
Global S&BT $ 41,593 $ 37,085 $ 128,760 $ 106,956
Oracle Solutions 17,682 20,762 59,165 55,763
SAP Solutions 12,758 14,047 35,700 45,858
Total revenue $ 72,033 $ 71,894 $ 223,625 $ 208,577
Global S&BT total revenue was $41.6 million and $128.8 million during the third
quarter and first nine months of 2022, respectively, as compared to $37.1
million and $107.0 million in the same period of 2021, reflecting the continued
year over year growth since the second quarter of 2020 and continuing demand for
digital transformation investments.
Oracle Solutions total revenue was $17.7 million and $59.2 million during the
third quarter and first nine months of 2022, respectively, as compared to $20.8
million and $55.8 million in the same periods of 2021. The decrease in revenue
over the three months ended September 30, 2022 , as compared to the same period
in 2021, was primarily driven by the extended client decision making during the
quarter as clients reconsidered their spending priorities.
SAP Solutions total revenue was $12.8 million and $35.7 million during the third
quarter and first nine months of 2022, respectively, as compared to $14.0
million and $45.9 million in the same periods of 2021. SAP Solutions total
revenue in the first nine months of 2021 included a $5.3 million software sales
transaction. The decrease in revenue in 2022 as compared to 2021, excluding the
software sale transaction, was primarily driven from a coming off strong 2021
results, as we were rebuilding our sales pipeline after the completion of large
SAP related engagements late in 2021, partially offset by strong software
transaction activity at the end of the third quarter of 2022.
Reimbursements as a percentage of Company total revenue were 1.4% and 1.2%
during the third quarter and first nine months of 2022, respectively, as
compared to 0.7% and 0.4%, in the same periods in 2021, respectively.
Reimbursements are project travel-related expenses passed through to a client
with no associated operating margin. We have experienced increased
client-related travel since the transition to a remote delivery model, however
we do not expect reimbursements to return to pre-pandemic levels.
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 cash,
acquisition-related non-cash stock based compensation expense, 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, decreased 5% to $42.9 million for
the third quarter of 2022 and increased 4% to $134.9 million for the first nine
months of 2022, as compared to $45.2 million and $129.6 million in the same
periods of 2021, respectively. The lower costs in the three-month period of 2022
were primarily a result of lower incentive compensation accruals and lower
utilization of subcontractors. The higher costs in the nine-month period of 2022
were primarily a result of hiring activities and increased utilization of
subcontractors to support business growth. Personnel costs as a percentage of
total Company revenue were 60% for both the third quarter and first nine months
of 2022, as compared to 63% and 62% for the same periods of 2021, respectively.
Non-cash stock based compensation expense, included in personnel costs before
reimbursable expenses was $1.6 million and $4.8 million for the third quarter
and first nine months of 2022, respectively, as compared to $1.7 million and
$4.9 million for the same periods of 2021, respectively.
Acquisition related non-cash stock based compensation expense, included in
personnel costs before reimbursable expenses, was $4 thousand and $12 thousand
for the third quarter and first nine months of 2022, respectively, as compared
to $19 thousand and $378 thousand for the same periods of 2021, respectively,
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 stock based compensation expense, amortization of intangible assets, acquisition related costs and various other overhead expenses.
SG&A costs decreased 1%, to$14.6 million and increased 3%, to$45.0 million , for the third quarter and first nine months of 2022, respectively, as compared to$14.8 million and$43.7 million for the same periods of 2021, respectively. This increase in the costs during the first nine months of 2022 was primarily due to increased non client billable expenses and increased investments in sales and marketing and information technology. SG&A costs as a percentage of total Company revenue were 20% during both the third quarter and first nine months of 2022, as compared to 21% for both of the same periods in 2021. 20 -------------------------------------------------------------------------------- Non-cash stock based compensation expense, included in SG&A, was$0.9 million and$3.0 million for the third quarter and first nine months of 2022, respectively, as compared to$0.9 million and$2.5 million for the same periods of 2021, respectively. The increase in the nine-month period is due to higher incentive compensation expense commensurate with Company performance. Amortization expense, included in SG&A, was$0 and$154 thousand million in the third quarter and first nine months of 2022, as compared to$0.3 million and$0.8 million during the same periods in 2021, respectively. The amortization expense related 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 have been fully amortized as of the second quarter of 2022. 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 administrative functions that are performed in a centralized manner that are not attributable to a particular segment. These administrative function costs include corporate general and administrative expenses, non-cash stock based compensation, depreciation and amortization expense, interest expense and the restructuring charges and reversals. Global S&BT segment profit increased to$14.0 million and$45.9 million for the third quarter and first nine months of 2022, respectively, as compared to$11.8 million and$34.5 million for the same periods in the previous year, respectively. This increase was primarily a result of increased revenue as discussed above. Oracle Solutions segment profit decreased to$3.3 million for the third quarter of 2022 from$5.4 million for the same period in the previous year. Oracle Solutions segment profit was$12.1 million for the first nine months of 2022 and 2021. The decrease in the three-month period was primarily due to lower revenue as discussed above. SAP Solutions segment profit increased to$3.8 million in the third quarter of 2022 as compared to$3.7 million in the same period in 2021 and decreased to$9.2 million in the first nine months of 2022, as compared to$15.6 million in the same period of 2021. SAP Solutions segment profit in the first nine months of 2021 included a$5.3 million software sales transaction and benefitted from large global engagements which drove higher utilization of subcontractors. Income Taxes. During the third quarter and first nine months of 2022, we recorded$3.7 million and$10.5 million of income tax expense, respectively, related to certain federal, foreign and state taxes which reflected an effective tax rate of 26% and 25%, respectively. In the third quarter and first nine months of 2021, we recorded$3.2 million and$9.4 million of income tax expense related to certain federal, foreign and state taxes which reflected an effective tax rate of 29% and 27%, respectively.
Liquidity and Capital Resources
As ofSeptember 30, 2022 andDecember 31, 2021 , we had$67.0 million and$45.8 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 under our credit facility) and cash flows generated by operations will be sufficient to fund our working capital and capital expenditure requirements, including working capital, 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 endedDecember 31, 2021 .
The following table summarizes our cash flow activity (in thousands):
Nine Months Ended
September 30 , October 1,
2022 2021
Cash flows provided by operating activities $ 34,078 $ 26,469
Cash flows used in investing activities $ (3,163 ) $ (2,255 )
Cash flows used in financing activities $ (9,648 ) $ (20,704 ) Cash Flows from Operating Activities
Net cash provided by operating activities was$34.1 million during the first nine months of 2022, as compared to$26.5 million during the same period in 2021. In 2022, the net cash provided by operating activities was primarily due to net income adjusted for non-cash items and an increase in income tax liabilities, partially offset by the decrease in accounts payable and accrued liabilities and other accruals primarily due to payments to vendors and the 2021 incentive compensation payments and lower contract liabilities. In 2021, the net cash provided by operating activities was primarily due to net income adjusted for non-cash items and an increase in incentive compensation and income tax accruals, partially offset by an increase in accounts receivable and contract assets. 21 --------------------------------------------------------------------------------
Cash Flows from Investing Activities
Net cash used in investing activities was$3.2 million during the first nine months of 2022, as compared to$2.3 million during the same period in 2021. During both periods, cash flows used in investing activities primarily related to investments for the development of our Executive Advisory Member Platform and continued development of our Quantum Leap benchmark and Digital Transformation technologies. The investing activities in 2022 also included purchases of computer equipment.
Cash Flows from Financing Activities
Net cash used in financing activities was$9.6 million and$20.7 million during the first nine months of 2022 and 2021, respectively. The usage of cash in the first nine months 2022 primarily related to the repurchase of$3.2 million of the Company's common stock and dividend payments of$7.0 million . The usage of cash in the first nine months 2021 primarily related to the repurchase of$14.6 million of the Company's common stock and dividend payments of$6.5 million . As ofSeptember 30, 2022 , we did not have any outstanding borrowings under our revolving line of credit (the "Credit Facility"), leaving us with a capacity of approximately$45.0 million . OnNovember 7, 2022 , we amended and restated our credit agreement in order to extend the maturity date of the Credit Facility and provide the Company with an additional$55 million in borrowing capacity, for an aggregate amount of up to$100 million . See Note 7, "Credit Facility," to our consolidated financial statements included in this Quarterly Report on Form 10-Q for more information. 22
--------------------------------------------------------------------------------
© Edgar Online, source
