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. 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 andU.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 endedDecember 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 inEurope .
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 inMarch 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 theU.S. Centers for Disease Control andthe 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
-------------------------------------------------------------------------------- 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 ofJune 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 %
$ 0.21 $ 0.14 $ 0.65 Revenue. We are a global company with operations 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 quarter and nine months endedSeptember 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 andEurope . 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
During 2019, we recorded restructuring costs of
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 endingSeptember 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 endedJune 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 ourEuropean REL Working Capital group in 2018.
Liquidity and Capital Resources
As ofSeptember 25, 2020 , andDecember 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 )
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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 ofSeptember 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 endedDecember 27, 2019 . 22
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