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MarketScreener Homepage  >  Equities  >  Nasdaq  >  The Hackett Group, Inc.    HCKT

THE HACKETT GROUP, INC.

(HCKT)
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HACKETT : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (form 10-Q)

11/04/2020 | 02:08pm EST

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS




This Quarterly Report on Form 10-Q includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. We intend the
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements. All statements regarding our expected financial
position and operating results, our business strategy, our financing plans and
forecasted demographic and economic trends relating to our industry are
forward-looking statements. These statements can sometimes be identified by our
use of forward-looking words such as "may," "will," "anticipate," "estimate,"
"expect," or "intend" and similar expressions. These statements involve known
and unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from the
results, performance or achievements expressed or implied by the forward-looking
statements. We cannot promise you that our expectations reflected in such
forward-looking statements will turn out to be correct. Factors that impact such
forward-looking statements include, among others, 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 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 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 coronavirus 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."



An additional description of our risk factors is set forth in our Annual Report
on Form 10-K for the year ended December 27, 2019. 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 the Annual Report on
Form 10-K 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 more than 17,850 benchmark and performance studies over
26 years at over 6,420 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, 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, SAP Solutions and One Stream 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. In spite
of some disruption 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, net revenue and dilutive earnings per share were
negatively impacted in the second and third quarters of 2020, and we expect
negative impacts to continue until economic conditions improve. A substantial or
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.
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.



                                       18
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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. In addition, at the end of June 2020, we reduced our global workforce
by approximately 10% of our global workforce and recorded a $5.0 million
restructuring charge. 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. Any future asset impairment charges, increases in
allowance for doubtful accounts, or restructuring charges will be dependent on
the severity and duration of the 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 COVID-19 could have on our financial condition and
operating results remains highly uncertain.



For more information, 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."

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):




                                                         Quarter Ended                                    Nine Months Ended
                                            September 25,            September 27,             September 25,             September 27,
                                                 2020                     2019                     2020                      2019
REVENUE:
Revenue before reimbursements            $ 57,769       100.0 %   $ 66,755       100.0 %   $ 175,587       100.0 %   $ 197,101       100.0 %
Reimbursements                                148                    5,935                     4,614                    16,265
TOTAL REVENUE                              57,917                   72,690                   180,201                   213,366
COST AND EXPENSES:
Cost of service:
Personnel costs before reimbursable
expenses                                   37,791        65.4 %     41,026  

61.5 % 117,558 67.0 % 120,780 61.3 % Stock compensation expense

                  1,508                      833                     4,449                     2,775
Acquisition-related compensation
expense (benefit)                              10                      157                        39                      (131 )
Acquisition-related non-cash stock
compensation
  expense                                     243                      322                       755                       690
Reimbursable expenses                         148                    5,935                     4,614                    16,265
TOTAL COST OF SERVICE                      39,700                   48,273                   127,415                   140,379
Selling, general and administrative
costs                                      12,732        22.0 %     14,085  

21.1 % 38,042 21.7 % 43,286 22.0 % Non-cash stock compensation expense

           711                      776                     1,830                     2,268
Amortization of intangible assets             247                      236                       723                       789
Acquisition-related costs                       -                       32                         -                        32
Acquisition-related contingent
consideration liability                         -                     (108 )                       -                    (1,133 )
Restructuring costs                             -                        -                     5,034                         -
TOTAL SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES                    13,690                   15,021                    45,629                    45,242
TOTAL COSTS AND OPERATING EXPENSES         53,390                   63,294                   173,044                   185,621
INCOME FROM OPERATIONS                      4,527         7.8 %      9,396        14.1 %       7,157         4.1 %      27,745        14.1 %
Other expense:
Interest expense                              (22 )                    (62 )                    (100 )                    (268 )
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES                         4,505         7.8 %      9,334  

14.0 % 7,057 4.0 % 27,477 13.9 % Income tax expense

                          1,362         2.4 %      2,427  

3.6 % 2,312 1.3 % 6,481 3.3 % INCOME FROM CONTINUING OPERATIONS (NET OF TAXES)

                                   3,143                    6,907                     4,745                    20,996
(Loss) income from discontinued
operations                                   (157 )                      2                      (165 )                      (4 )
NET INCOME                               $  2,986         5.2 %   $  6,909

10.3 % $ 4,580 2.6 % $ 20,992 10.7 % Diluted net income per common share $ 0.09

                 $   0.21$    0.14$    0.65




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 quarter and nine months ended
September 25, 2020 and the comparable periods of 2019. Revenue is analyzed based
on geographical location of engagement team personnel.



                                       19

--------------------------------------------------------------------------------


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



                                                       Quarter Ended                         Nine Months Ended
                                             September 25,       September 27,       September 25,       September 27,
                                                 2020                2019                2020                2019
S&BT                                        $        22,217$        28,221$        65,571$        80,999
EEA                                                  29,710              30,134              92,238              86,682
International                                         5,842               8,400              17,778              29,420

Revenue from continuing operations before

  reimbursements                            $        57,769$        66,755$       175,587$       197,101




Our total Company net revenue from continuing operations, or revenue before
reimbursements, decreased 13% to $57.8 million, and 11% to $175.6 million in the
third quarter and first nine months of 2020, respectively, as compared to $66.8
million and $197.1 million, in the same respective periods of 2019. Net revenues
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 US and Europe. In the third quarter and first nine months of
2020, one customer accounted for 6% and 5%, respectively, of our total revenue.
In the third quarter and first nine months of 2019, one customer accounted for
6% and 4%, respectively, of our total revenue.

S&BT net revenue was $22.2 million and $65.6 million during the third quarter
and first nine months of 2020, respectively, as compared to $28.2 million and
$81.0 million in the same periods of 2019. This group's business transformation
practice was disrupted by the impact of the COVID-19 pandemic.

EEA net revenue was $29.7 million and $92.2 million during the third quarter and
first nine months of 2020, respectively, as compared to $30.1 million and $86.7
million in the same respective periods of 2019. The decrease in the third
quarter of 2020, as compared to the same period in 2019, was driven by declines
in our Oracle EPM practice, partially offset by growth from our SAP S4 HANA
implementation and Reseller practices, and growth from our Oracle Cloud ERP and
OneStream Practices. The year over year increase was driven by strong growth in
our SAP S4 Hana implementation and Reseller practices, as well as growth from
our Oracle Cloud ERP and OneStream practices.

Hackett US net revenue from continuing operations represented 90% of our total
Company net revenue during both the third quarter and first nine months of 2020,
respectively, and decreased 11% and 6%, respectively, when compared to the same
periods in 2019.

Hackett international net revenue from continuing operations was $5.8 million
and $17.8 million in the third quarter and first nine months of 2020,
respectively, as compared to $8.4 million and $29.4 million during the same
periods in 2019, respectively. 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 10% of total Company net revenue during both the third quarter and
first nine months of 2020, respectively, as compared to 13% and 15% for the same
respective periods in 2019.

Reimbursements as a percentage of total net revenue were 0% and 3% during the
third quarter and first nine months of 2020, respectively, as compared to 9% and
8% for both of the same respective periods in 2019. Reimbursements are project
travel-related expenses passed through to a client with no associated margin. As
a result of COVID-19, most travel was eliminated except where necessary to meet
customer needs.

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 8%, to $37.8 million from $41.0 million for the third
quarter of 2020, as compared to the same period in 2019. Personnel costs
decreased 3%, to $117.6 million from $120.8 million for first nine months of
2020, as compared to the same period in 2019.  The decrease in personnel costs
in the third quarter and first nine months of 2020 was primarily due to the
restructuring actions that were implemented at the end of the second quarter of
2020 which included a reduction of approximately 10% of the global workforce.
Personnel costs before reimbursable expenses, as a percentage of revenue before
reimbursements, were 65% and 67% for the third quarter and first nine months of
2020, respectively, as compared to 62% and 61% for the same respective periods
of 2019.

Non-cash stock compensation expense was $1.5 million and $4.4 million for the
third quarter and first nine months of 2020, respectively, as compared to $0.8
million and $2.8 million for the same periods of 2019, respectively.

The acquisition-related compensation expense and benefit in 2020 and 2019
related to the accrual for the cash portion of contingent consideration related
to two acquisitions, all of which is subject to service vesting and as a result
has been recorded as compensation expense. The majority of the liabilities were
settled during the fourth quarter of 2019.

                                       20

--------------------------------------------------------------------------------

Acquisition related non-cash stock compensation expense in 2020 and 2019 related to equity awards issued in relation to acquisitions between 2014 and 2017.


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 were $12.7 million and $38.0 million for the third quarter and first
nine months of 2020, respectively, as compared to $14.1 million and $43.3
million for the same periods in 2019, respectively. The decrease in SG&A was
primarily due to the reduction in travel related selling and marketing
activities as a result of the COVID-19 pandemic. These SG&A costs as a
percentage of revenue before reimbursements were 22% for both the third quarter
and first nine months of 2020, respectively, and 21% and 22% for the same
respective periods in 2019.

Non-cash stock compensation expense was $0.7 million and $1.8 million for the
third quarter and first nine months of 2020, respectively, as compared to $0.8
million and $2.3 million for the same respective periods in 2019.

Amortization expense was $0.2 million and $0.7 million in the third quarter and
first nine months of 2020, respectively, as compared to $0.2 million and $0.8
million in the same respective periods in 2019. The amortization expense in 2020
and 2019 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 will continue to amortize until 2022 and the intangible assets
related to the joint venture will continue to amortize until 2021.

Acquisition-related Contingent Consideration Liability. During the first quarter
of 2019, the liability related to the cash portion of the Jibe acquisition
contingent consideration due to the selling shareholders, which was not subject
to vesting, resulted in a benefit due to the reduction of the contingent earnout
liability. This liability was settled in the fourth quarter of 2019.

Restructuring Costs. During the second quarter of 2020, we recorded restructuring costs of $5.0 million, which were primarily related to the reduction of staff in the United States and Europe as a result of the impact of the COVID-19 pandemic.

During 2019, we recorded restructuring costs of $3.3 million, which was primarily related to the reduction of staff in Europe and Australia.


Income Taxes. During the third quarter and first nine months of 2020, we
recorded income tax expense of $1.4 million and $2.3 million, respectively,
related to certain federal, foreign and state taxes which reflected an effective
tax rate of 30% and 33%, respectively. In the third quarter and first nine
months of 2019, we recorded income tax expense of $2.4 million and $6.5 million,
respectively, related to certain federal, foreign and state taxes which
reflected an effective tax rate of 26% and 24%, respectively. The increase in
the nine months ending September 25, 2020 GAAP income tax rate is primarily due
to a lower tax benefit related to share based compensation when compared to the
same period in the prior year, restructuring charges in the quarter ended June
26, 2020 in countries with lower statutory income tax rates and changes in the
Company's overall profitability due to the impact of the COVID-19 pandemic.

Discontinued Operations. The discontinued operations related to the settlement
of an employment matter in connection with the discontinuance of our European
REL Working Capital group in 2018.

Liquidity and Capital Resources


As of September 25, 2020, and December 27, 2019, we had $43.2 million and $26.0
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 revolving line of credit (the
"Revolver")) and cash flows generated by operations will be sufficient to fund
our working capital and capital expenditure requirements for at least the next
twelve months. We may decide to raise additional funds in order to fund
expansion, to develop new or further enhance products and services, to respond
to competitive pressures, or to acquire complementary businesses or
technologies. There is no assurance that additional financing would be available
when needed or desired.

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



                                                       Nine Months Ended
                                               September 25,       September 27,
                                                   2020                2019
Cash flows provided by operating activities   $        31,156$        26,540
Cash flows used in investing activities       $        (1,498 )$        (3,719 )
Cash flows used in financing activities       $       (12,526 )$       (20,309 )


                                       21
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Cash Flows from Operating Activities


Net cash provided by operating activities was $31.2 million during the first
nine months of 2020, as compared to $26.5 million during the same period in
2019. In 2020, the net cash provided by operating activities was primarily due
to net income adjusted for non-cash items, decreases in accounts receivable and
contract assets and increases in accrued expenses and other liabilities,
partially offset by decreases in accounts payable due to the timing of vendor
payments and decreases in employee reimbursable expenses resulting from
decreased travel. In 2019, 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 due to the timing of vendor
payments and a decrease in accrued expenses and liabilities after the payout of
2018 incentive compensation.

Cash Flows from Investing Activities


Net cash used in investing activities was $1.5 million and $3.7 million during
the first nine months of 2020 and 2019, respectively. During the first nine
months of 2020, cash flows used in investing activities included investments
related to the development of our Quantum Leap benchmark technology. In the
comparable period in 2019, cash flows used in investing activities included
investments related to our internal corporate systems, the global rollout of new
laptops which occurs every three to four years, and the development of our
Quantum Leap benchmark technology.

Cash Flows from Financing Activities


Net cash used in financing activities was $12.5 million and $20.3 million during
the first nine months 2020 and 2019, respectively. The usage of cash in the
first nine months of 2020 primarily related to the dividend payments of $8.9
million and the repurchase of $4.0 million of our Company common stock. The
usage of cash in the comparable period in 2019 was primarily related to the
dividend payments of $11.2 million, the repurchase of $5.5 million of our
Company common stock and the net payments made under the Revolver of $4.0
million.

As of September 25, 2020, we did not have any outstanding borrowings under 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 December 27, 2019.



                                       22

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© Edgar Online, source Glimpses

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