UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2024
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 333-48123
The Hackett Group, Inc.
(Exact name of registrant as specified in its charter)
Florida
65-0750100
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1001 Brickell Bay Drive, Suite 3000
Miami, Florida
33131
(Address of principal executive offices)
(Zip Code)
(305) 375-8005
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $.001 per share
HCKT
NASDAQ Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer
Non-Accelerated Filer
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of November 1, 2024, there were 27,593,479 shares of common stock outstanding.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1.
Financial Statements
Consolidated Balance Sheets as of September 27, 2024 (unaudited) and December 29, 2023
3
Consolidated Statements of Operations for the Three and Nine Months Ended September 27, 2024, and September 29, 2023, (unaudited)
4
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 27, 2024, and September 29, 2023, (unaudited)
5
Consolidated Statements of Cash Flows for the Nine Months Ended September 27, 2024, and September 29, 2023, (unaudited)
6
Consolidated Statements of Shareholders' Equity for the Three and Nine Months Ended September 27, 2024, and September 29, 2023, (unaudited)
7
Notes to Consolidated Financial Statements (unaudited)
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
20
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
25
Item 4.
Controls and Procedures
Item 5.
Other Information
PART II - OTHER INFORMATION
Legal Proceedings
26
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
27
SIGNATURES
28
2
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
September 27,
December 29,
2024
2023
ASSETS
Current assets:
Cash
$
9,964
20,957
Accounts receivable and contract assets, net of allowance of $1,652 and $1,072 at September 27, 2024 and December 29, 2023, respectively
61,227
52,113
Prepaid expenses and other current assets
3,659
2,368
Total current assets
74,850
75,438
Property and equipment, net
20,307
20,044
Other assets
367
285
Intangible assets
2,800
-
Goodwill
89,417
84,242
Operating lease right-of-use assets
3,010
1,419
Total assets
190,751
181,428
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
5,280
7,557
Accrued expenses and other liabilities
26,142
26,801
Contract liabilities
12,572
12,087
Income tax payable
4,323
2,360
Operating lease liabilities
1,173
1,083
Total current liabilities
49,490
49,888
Non-current deferred tax liability, net
8,565
8,118
Long term debt, net
19,739
32,711
2,041
631
Total liabilities
79,835
91,348
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $0.001 par value, 1,250,000 shares authorized; none issued and outstanding
—
Common stock, $0.001 par value, 125,000,000 shares authorized; 61,015,604 and 60,581,418 shares issued at September 27, 2024 and December 29, 2023, respectively
61
Additional paid-in capital
322,644
317,034
Treasury stock, at cost, 33,423,164 and 33,314,926 shares September 27, 2024 and December 29, 2023, respectively
(277,392
)
(274,600
Retained earnings
77,772
60,820
Accumulated other comprehensive loss
(12,169
(13,235
Total shareholders' equity
110,916
90,080
Total liabilities and shareholders' equity
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Quarter Ended
Nine Months Ended
September 29,
Revenue:
Revenue before reimbursements
77,949
74,634
229,572
220,106
Reimbursements
1,828
1,222
5,048
4,081
Total revenue
79,777
75,856
234,620
224,187
Costs and expenses:
Cost of service:
Personnel costs before reimbursable expenses (includes $2,135 and $5,168 and $1,518 and $4,687 of non-cash stock based compensation expense in the three and nine months ended September 27, 2024 and September 29, 2023, respectively)
46,417
44,421
137,583
132,990
Reimbursable expenses
Total cost of service
48,245
45,643
142,631
137,071
Selling, general and administrative costs (includes $1,688 and $4,104 and $1,193 and $3,243 of non-cash stock based compensation expense in the three and nine months ended September 27, 2024 and September 29, 2023, respectively)
18,732
16,470
55,046
49,331
Legal settlement and related costs
102
Total costs and operating expenses
66,977
62,113
197,779
186,402
Income from operations
12,800
13,743
36,841
37,785
Other expense, net:
Interest expense, net
(368
(814
(1,352
(2,594
Income before income taxes
12,432
12,929
35,489
35,191
Income tax expense
3,845
3,509
9,423
8,890
Net income
8,587
9,420
26,066
26,301
Basic net income per common share:
Income per common share
0.31
0.35
0.95
0.97
Weighted average common shares outstanding
27,645
27,220
27,561
27,146
Diluted net income per common share:
0.34
0.93
Weighted average common and common equivalent shares outstanding
28,142
27,818
27,920
27,545
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Foreign currency translation adjustment
1,475
(1,018
1,066
250
Total comprehensive income
10,062
8,402
27,132
26,551
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense
2,824
2,528
Amortization of debt issuance costs
56
54
Non-cash stock based compensation expense
9,272
7,930
Provision for doubtful accounts
275
219
Loss on foreign currency translation
509
263
Deferred income tax expense
459
1,617
Changes in assets and liabilities, net of acquisition:
Increase in accounts receivable and contract assets
(8,895
(14,134
Increase in prepaid expenses and other assets
(1,244
(1,482
Decrease in accounts payable
(2,277
(3,701
Decrease in accrued expenses and other liabilities
(2,387
(5,619
Increase (decrease) in contract liabilities
468
(409
Increase (decrease) in income tax payable
1,963
(1,750
Net cash provided by operating activities
27,089
11,817
Cash flows from investing activities:
Purchases of property and equipment
(3,061
(3,203
Acquisition of business, net of cash acquired
(6,541
Net cash used in investing activities
(9,602
Cash flows from financing activities:
Debt issuance costs
(28
(14
Debt proceeds
5,000
Repayment of debt
(13,000
(21,000
Proceeds from ESPP
535
481
Taxes paid to satisfy employee withholding tax obligations
(4,070
(3,712
Dividends paid
(9,070
(8,978
Repurchase of common stock
(2,792
(734
Net cash used in financing activities
(28,425
(28,957
Effect of exchange rate on cash
(55
(33
Net decrease in cash
(10,993
(20,376
Cash at beginning of period
30,255
Cash at end of period
9,879
Supplemental disclosure of cash flow information:
Cash paid for income taxes
6,653
8,719
Cash paid for interest
1,592
2,690
Supplemental disclosure of non-cash flow financing activities:
Dividend declared during the quarter and paid the following quarter
3,041
2,994
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Additional
Other
Total
Common Stock
Paid in
Treasury Stock
Retained
Comprehensive
Shareholders'
Shares
Amount
Capital
Earnings
Loss
Equity
Balance at December 29, 2023
60,581
(33,315
Issuance of common stock
378
(3,782
Treasury stock purchased
(43
(1,055
Amortization of restricted stock units and common stock subject to vesting requirements
2,874
Dividends declared
(3,036
8,731
Foreign currency translation
(331
Balance at March 29, 2024
60,959
316,126
(33,358
(275,655
66,515
(13,566
93,481
41
391
2,718
(3,037
8,748
(78
Balance at June 28, 2024
61,000
319,235
72,226
(13,644
102,223
15
(145
(65
(1,737
3,554
(3,041
Balance at September 27, 2024
61,015
(33,423
Balance at December 30, 2022
60,148
60
308,325
(33,277
(273,866
38,640
(14,881
58,278
343
(3,529
(37
(711
3,662
(2,990
8,161
570
Balance at March 31, 2023
60,491
308,458
(33,314
(274,577
43,811
(14,311
63,441
38
1
362
363
(23
2,685
(2,991
8,720
698
Balance at June 30, 2023
60,529
311,505
49,540
(13,613
72,893
9
(67
2,608
(2,994
Balance at September 29, 2023
60,538
314,046
55,966
(14,631
80,842
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and General Information
Basis of Presentation
The accompanying consolidated financial statements of The Hackett Group, Inc. (“Hackett” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the Company’s accounts and those of its wholly-owned subsidiaries which the Company is required to consolidate. All intercompany transactions and balances have been eliminated in the consolidation.
In the opinion of management, the accompanying consolidated financial statements reflect all normal and recurring adjustments which are necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows as of the dates and for the periods presented. The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, these statements do not include all the disclosures normally required by U.S. GAAP for annual financial statements and should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 29, 2023, included in the Annual Report on Form 10-K filed by the Company with the SEC on March 1, 2024. The consolidated results of operations for the quarter and nine months ended September 27, 2024, are not necessarily indicative of the results to be expected for any future period or for the full fiscal year.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Business Combination
On September 16, 2024, the Company executed an agreement to acquire 100% of the equity of LeewayHertz Technologies Private Limited (“LeewayHertz”), a technology consulting company based in India, focused on artificial intelligence (A.I.) technology solutions for a provisional purchase consideration of $7.8 million subject to a working capital achievement. This acquisition marks a significant milestone in the Company's aggressive strategy to become a leading architect of its clients' Gen A.I. journey. The acquisition closed on September 23, 2024. Leeway’s founder, one of LeewayHertz’s owners, was hired by the Company to serve as its executive vice president of the A.I. practice.
The following table summarizes the provisional fair value of the assets acquired and liabilities assumed:
Assets / Liabilities
1,020
Current assets
2,081
Current liabilities
(2,587
Net assets acquired
3,314
Consideration
7,806
4,492
As a result, the provisional excess of the purchase price over the assets acquired resulted in goodwill of $4.5 million. Additionally, the Company recognized provisional intangible assets of $2.8 million, with a remaining weighted average useful life of 4.7 years. The fair values of identifiable intangible assets acquired were prepared by a third-party valuation specialist and incorporate significant unobservable inputs, judgment, and estimates, including the amount and timing of future cash flows. The intangible assets will be amortized in accordance with the Company’s accounting policies. The following table summarizes the preliminary value of the intangible assets:
1. Basis of Presentation and General Information (continued)
Useful Life
Category
(in years)
Customer Relationships
2,500
Technology
200
Non-Compete
100
The Company recognized $53 thousand of transactions costs related to the acquisition and no amortization was recorded in the three months ended September 27, 2024.
The amounts recorded for certain assets and liabilities and related disclosures are preliminary in nature and are subject to adjustment as additional information is obtained about their acquisition date fair values. Since the acquisition was only recently completed, the allocation of the purchase price is preliminary and will likely change in future periods as fair value estimates of the assets acquired and liabilities assumed are finalized, including those primarily related to working capital, property and equipment, intangible assets, and taxes. The final determination of the fair values will be completed within the one-year measurement period.
Also, in connection with the acquisition, the Company and LeewayHertz’s founder are creating a joint venture whereby The Hackett Group will contribute its AI XPLR platform and LeewayHertz will contribute its ZBrain platform. The integration of AI XPLR and the ZBrain Gen A.I. orchestration solution will enable the joint venture to provide advanced and tailored Gen AI solutions to its clients. The joint venture is expected to be formed by the end of the Company's fiscal year 2024.
Segment Reporting
Segments are defined as components of a company that engage in business activities from which they earn revenue and incur expenses, and for which separate financial information is available and is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company assesses its operating segments under the management approach in accordance with ASC 280, "Segment Reporting" (ASC 280), and has determined that it has three operating segments: Global S&BT, Oracle Solutions and SAP Solutions which are also its reportable segments. See Note 11 “Segment Information and Geographical Data” for detailed segment information.
Goodwill and Other Intangible Assets
For acquisitions accounted for as a business combination, goodwill represents the excess of the cost over the fair value of the net assets acquired. The Company has organized its operating and internal reporting structure to align with its primary market solutions. In accordance with ASC 280, management made the determination to present three operating segments, three reportable segments and three reporting units as follows: (1) Global S&BT, (2) Oracle Solutions, and (3) SAP Solutions. Global S&BT includes the results of the Company’s Gen A.I. and strategic business consulting practices; Oracle Solutions includes the results of the Company’s Oracle EPM/ERP and Digital AMS practices; SAP Solutions includes the Company’s SAP applications and related SAP service offerings. A reporting unit is an operating segment or one level below an operating segment to which goodwill is assigned. The goodwill was allocated to the reporting unit based on the reporting unit's relative fair value. The carrying amount of goodwill by reporting unit is as follows, which includes the provisional goodwill allocated to the LeewayHertz acquisition (in thousands):
Foreign
Additions/
Currency
Adjustments
Translation
Global S&BT
57,550
683
62,725
Oracle Solutions
16,699
SAP Solutions
9,993
Revenue Recognition
The Company primarily generates its revenue from providing professional services to its clients. The Company also generates revenue from software sales, software maintenance and support and subscriptions to its executive and best practices advisory programs. A single contract could include one or multiple performance obligations. For those contracts that have multiple performance obligations, the Company allocates the total transaction price to each performance obligation based on its relative standalone selling price. The Company determines the standalone selling price based on the respective selling price of the individual elements when sold separately.
Revenue is recognized when control of the goods and services provided are transferred to the Company’s customers, in an amount that reflects the consideration it expects to be entitled to in exchange for those goods and services using the following steps: 1) identify the contract, 2) identify the performance obligations, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and 5) recognize revenue as or when the Company satisfies the performance obligations.
The Company typically satisfies its performance obligations for professional services over time as the related services are provided. The performance obligations related to software maintenance and support and subscriptions to its executive and best practice advisory programs are typically satisfied evenly over the course of the service period. Other performance obligations, such as software sales, are satisfied at a point in time.
The Company generates revenue under four types of billing arrangements: fixed-fee; time-and-materials; executive and best practice advisory services; and software sales and software maintenance and support.
In fixed-fee billing arrangements, which would also include contracts with capped fees, the Company agrees to a pre-established fee or fee cap in exchange for a predetermined set of professional services. The Company sets the fees based on its estimates of the costs and timing for completing the engagements. The Company generally recognizes revenue under fixed-fee or capped fee arrangements using a proportionate performance approach, which is based on work completed to-date as compared to estimates of the total services to be provided under the engagement. Estimates of total engagement revenue and cost of services are monitored regularly during the term of the engagement. If the Company’s estimates indicate a potential loss, such a loss is recognized in the period in which the loss first becomes probable and reasonably estimable. The customer is invoiced based on the contractual agreement between the parties, typically bi-weekly, monthly or milestone driven, with net thirty or sixty-day terms, however client terms are subject to change.
Time-and-material billing arrangements require the client to pay based on the number of hours worked by the Company’s consultants at agreed hourly rates. The Company recognizes revenue under time-and-material arrangements as the related services or goods are provided, using the right to invoice practical expedient which allows it to recognize revenue in the amount based on the number of hours worked and the agreed upon hourly rates. The customer is invoiced based on the contractual agreement between the parties, typically bi-weekly, monthly or milestone driven, with net thirty or sixty-day terms, however client terms are subject to change.
Advisory services contracts are typically in the form of a subscription agreement which allows the customer access to the Company’s executive and best practice advisory programs. There is typically a single performance obligation and the transaction price is the contractual amount of the subscription agreement. Revenue from advisory services contracts is recognized ratably over the life of the agreements. Customers are typically invoiced at the inception of the contract, with net thirty or sixty-day terms, however client terms are subject to change.
The resale of on-premise software, cloud software and maintenance contracts are in the form of SAP America ("SAP") software or maintenance agreements provided by SAP. SAP is the principal and the Company is the agent in these transactions as the Company does not obtain title to the software and maintenance which is sold simultaneously. The transaction price is the Company’s agreed-upon percentage of the software sale for either on-premise software or cloud software or maintenance amount in the contract with the vendor. Revenue for the resale of software is recognized upon contract execution and customer’s receipt of the software. The Company also provides software maintenance on other ERP systems, primarily Oracle. Revenue from maintenance contracts is recognized ratably over the life of the agreements. The customer is typically invoiced at contract inception, with net thirty or sixty-day terms, however client terms are subject to change.
Revenue before reimbursements excludes reimbursable expenses charged to clients. Reimbursements, which include travel and out-of-pocket expenses, are included in revenue, and an equivalent amount of reimbursable expenses is included in the cost of service.
Expense reimbursements that are billable to clients are included in total revenue and are substantially all billed as time-and-material billing arrangements. Therefore, the Company recognizes all reimbursable expenses as revenue as the related services are provided, using the right to invoice practical expedient. Reimbursable expenses are recognized as expenses in the period in which the expense is incurred. Any expense reimbursements that are billable to clients under fixed-fee billing arrangements are recognized in line with the proportionate performance approach.
10
The payment terms and conditions in the Company’s customer contracts vary. The agreements entered into in connection with a project, whether time and materials-based or fixed-fee or capped-fee based, typically allow clients to terminate early due to breach or for convenience with 30 days’ notice. In the event of termination, the client is contractually required to pay for all time, materials and expenses incurred by the Company through the effective date of the termination. In addition, from time to time the Company enters into agreements with its clients that limit its right to enter into business relationships with specific competitors of that client for a specific time period. These provisions typically prohibit the Company from performing a defined range of services which it might otherwise be willing to perform for potential clients. These provisions are generally limited to six to twelve months and usually apply only to specific employees or the specific project team.
Differences between the timing of billings and the recognition of revenue are recognized as either contract assets or contract liabilities in the accompanying consolidated balance sheets. Revenue recognized for services performed but not yet billed to clients is recorded as contract assets and is included within accounts receivable and contract assets. Services not yet performed, however billed to the client and uncollected at period end, are recorded as contract assets and are included within accounts receivable and contract assets. Client prepayments are classified as contract liabilities and recognized over future periods as earned in accordance with the applicable engagement agreement. See Note 3 for the accounts receivable and contract asset balances. During the quarter and nine months ended September 27, 2024, the Company recognized $1.7 million and $10.7 million, respectively, of revenue as a result of changes in the contract liability balance, as compared to $1.5 million and $12.1 million, respectively, for the quarter and nine months ended September 29, 2023.
Based on the information that management reviews internally for evaluating operating segment performance and nature, amount, timing, and uncertainty of revenue and cash flows affected by economic factors, the Company disaggregates revenue as follows for the quarters and nine months ended September 27, 2024 and September 29, 2023 (in thousands):
Global S&BT:
North America Consulting
36,563
37,032
105,201
109,642
International Consulting
7,502
6,766
22,018
20,123
Total Global S&BT
44,065
43,798
127,219
129,765
Oracle Solutions:
Consulting and software support and maintenance
22,759
20,831
67,533
58,774
Total Oracle Solutions
SAP Solutions:
10,934
10,605
31,576
32,372
Software license sales
2,019
622
8,292
3,276
Total SAP Solutions
12,953
11,227
39,868
35,648
Total segment revenue
The total revenue from the Global S&BT segment, the Oracle Solutions segment and the SAP Solutions segment's consulting and software support and maintenance services is all recognized over time. The software license sales revenue included in the SAP Solutions segment is recognized at a point in time.
Capitalized Sales Commissions
Sales commissions earned by the Company’s sales force are considered the incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and then amortized as project revenue is recognized. The Company determined the period of amortization by taking into consideration the customer contract period, which is generally less than 12 months. Commission expenses are included in the Selling, general and administrative costs in the accompanying consolidated statements of operations. As of December 29, 2023 and December 30, 2022, the Company had $1.7 million and $1.5 million, respectively, of deferred commissions, of which $0.2 million and $0.9 million was amortized during the quarter and nine months ended September 27, 2024, respectively, and $0.3 million and $0.9 million for the same periods in 2023, respectively. No impairment loss was recognized relating to the capitalization of deferred commissions.
11
Practical Expedients
The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be less than one year.
Sales tax collected from customers and remitted to the applicable taxing authorities is accounted for on a net basis, with no impact on revenue.
Fair Value
The Company’s financial instruments consist of cash, accounts receivable and contract assets, accounts payable, accrued expenses and other liabilities, contract liabilities and long-term debt. As of September 27, 2024 and December 29, 2023, the carrying amount of each financial instrument approximated the instrument’s respective fair value due to either the short-term nature or the maturity of these instruments.
The Company uses significant other observable market data or assumptions (Level 2 inputs as defined in accounting guidance) that it believes market participants would use in pricing debt. The fair value of the debt approximated the carrying amount, using Level 2 inputs, due to the short-term variable interest rates based on market rates.
Recent Accounting Pronouncements
In November 2023, accounting guidance was issued that requires additional disclosures of reportable segment information. The guidance requires that public entities disclose, on an annual and interim basis (1) significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and included within each reported measure of segment profit or loss, (2) an amount for other segment items by reportable segment and a description of its composition, (3) provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by Topic 280 in interim periods, (4) clarify that if the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, a public entity may report one or more of those additional measures of segment profit; at least one of the reported segment profit or loss measures should be the measure that is most consistent with the measurement principles used in measuring the corresponding amounts in the public entity’s consolidated financial statements, (5) the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and in deciding how to allocate resources, and (6) if a public entity has a single reportable segment to provide all the disclosures required by the amendments in this update and all existing segment disclosures in Topic 280. The amendments in this update do not change how operating segments are identified or aggregated nor how the quantitative thresholds are applied to determine its reportable segments. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments in this update should be applied retrospectively to all prior periods presented in the financial statements. Upon transition, the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption. The Company is currently evaluating the impact the adoption of this accounting standard update will have on its footnote disclosures.
12
2. Net Income per Common Share
Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. With regard to common stock subject to vesting requirements and restricted stock units issued to the Company’s employees and non-employee members of its Board of Directors, the calculation includes only the vested portion of such stock and units.
Diluted net income per common share is computed by dividing net income by the weighted average number of common shares outstanding, increased by the assumed conversion of other potentially dilutive securities during the period.
The following table reconciles basic and dilutive weighted average common shares:
Basic weighted average common shares outstanding
27,645,288
27,220,176
27,561,279
27,146,095
Effect of dilutive securities:
Unvested restricted stock units and common stock subject to vesting requirements issued to employees and non-employees
496,226
597,773
358,764
398,643
Dilutive weighted average common shares outstanding
28,141,514
27,817,949
27,920,043
27,544,738
Approximately one thousand shares of common stock equivalents were excluded from the computations of diluted net income per common share for the quarter and nine months ended September 27, 2024, respectively, as compared to 102 shares and two thousand shares for the same periods in 2023, respectively, as inclusion would have had an anti-dilutive effect on diluted net income per common share. In addition, 84 thousand restricted stock units in the quarter and nine months ended September 27, 2024, were excluded from the computations of diluted net income per common share as they are contingently issuable shares with market-related conditions that have not been satisfied. Please see Note 7 for further information.
3. Accounts Receivable and Contract Assets, Net
Accounts receivable and contract assets, net, consisted of the following (in thousands):
Accounts receivable
39,250
35,640
Contract assets (unbilled revenue)
23,629
17,545
Allowance for doubtful accounts
(1,652
(1,072
Accounts receivable and contract assets, net
Accounts receivable is net of uncollected advanced billings. Contract assets represent revenue for services performed that have not been invoiced.
4. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following (in thousands):
Accrued compensation and benefits
10,389
9,162
Accrued bonuses
6,813
8,246
Accrued dividend payable
3,042
2,997
Accrued sales, use, franchise and VAT tax
2,098
2,862
Non-cash stock based compensation accrual
533
408
Other accrued expenses
3,267
3,126
Total accrued expenses and other liabilities
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5. Lease Commitments
The Company has operating leases for office space and, to a much lesser extent, operating leases for equipment. The Company’s office leases are between terms of 1 year and 5 years. Rents usually increase annually in accordance with defined rent steps or are based on current year consumer price index adjustments. Some of the lease agreements contain one or more of the following provisions: tenant allowances, rent holidays, lease premiums, and rent escalation clauses. There are typically no purchase options, residual value guarantees or restrictive covenants. When renewal options exist, the Company generally does not deem them to be reasonably certain to be exercised, and therefore the amounts are not recognized as part of the lease liability nor the right of use asset.
The components of lease expense were as follows for the nine months ended September 27, 2024 (in thousands):
Operating lease cost
882
Total net lease costs
The weighted average remaining lease term is 3.7 years. The weighted average discount rate utilized is 5.8%. For the quarter and nine months ended September 27, 2024, the Company paid $0.3 million and $1.1 million, respectively, from operating cash flows for its operating leases.
Future minimum lease commitments under non-cancellable operating leases as of September 27, 2024, were as follows (in thousands):
2024 (excluding the nine months ended September 27, 2024)
355
2025
1,055
2026
863
2027
791
2028 and thereafter
660
Total lease payments
3,724
Less imputed interest
(510
3,214
As of September 27, 2024, the Company does not have any additional material operating leases that have not yet commenced.
6. Credit Facility
On November 7, 2022, the Company entered into a third amended and restated credit agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, and the lenders party thereto, pursuant to which the lenders agreed to amend and restate its existing credit agreement, in order to extend the maturity date of the revolving line of credit and provide the Company with an additional $55.0 million in borrowing capacity, for an aggregate amount of up to $100.0 million from time to time pursuant to a revolving line of credit (the “Credit Facility”). The Credit Facility matures on November 7, 2027.
The obligations of Hackett under the Credit Facility are guaranteed by active existing and future material U.S. subsidiaries of Hackett (the “U.S. Subsidiaries”) and are secured by substantially all of the existing and future property and assets of Hackett and the U.S. Subsidiaries.
The interest rates per annum applicable to loans under the Credit Facility will be, at the Company’s option, equal to either a base rate or a Secured Overnight Financing Rate ("SOFR") rate. The applicable margin percentage is based on the consolidated leverage ratio, as defined in the Credit Agreement. As of September 27, 2024, the applicable margin percentage was 1.50% per annum for the SOFR rate, and 0.75% per annum, for the base rate. As of September 27, 2024, the interest rate on the Company's outstanding debt was 6.6%, utilizing the SOFR margin percentage. The interest rate of the commitment fee as of September 27, 2024 was 0.125%. Interest payments are made monthly.
The Company is subject to certain covenants, including total consolidated leverage, fixed cost coverage and liquidity requirements, each as set forth in the Credit Agreement, subject to certain exceptions. As of September 27, 2024, the Company was in compliance with all covenants.
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6. Credit Facility (continued)
As of September 27, 2024, the Company had $20.0 million of outstanding debt, excluding $0.3 million of deferred debt costs, which will be amortized over the remaining life of the Credit Facility. As of December 29, 2023, the Company had $33.0 million of outstanding debt, excluding $0.3 million of deferred debt costs.
7. Stock Based Compensation
Restricted Stock Units
On September 16 and 17, 2024, the Company granted its Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and certain other Company leaders performance-based restricted stock units, in the amounts of 786,885, 413,115, 72,000, and 607,350, respectively. In connection with the awards, the annual equity incentive award opportunities for the recipients during the performance period of the awards will be reduced by 50% compared to the annual equity incentive award opportunities in the Company’s executive compensation program for 2024. The awards are split into three equal tranches with each tranche having its own market condition and service condition. The market condition is met when the Company’s stock price reaches a certain share price hurdle for twenty consecutive trading days during the performance period from the grant date through December 31, 2028. The share price hurdles are $30, $40, and $50 for the first, second, and third tranches, respectively. Additionally, the service condition is met if the employee is employed on the first, second, and third anniversary of the grant date for the first tranche, second tranche, and third tranche, respectively.
Furthermore, if the second or third tranches are not met during the performance period, and the volume weighted average of the Company’s stock price falls between two share price hurdles for over 20 consecutive trading days immediately prior to the end of the performance period, the employee will vest in an interpolated amount of the next tranche.
The Company used a lattice valuation model to determine the fair value of the three tranches as of the grant date. The lattice valuation model, using different share price paths, calculates a derived service period which is the median share price path on which the market condition is satisfied for each tranche. The requisite service period was determined to be service conditions as the service conditions are greater than the derived service period. For each of the three tranches, stock compensation expense is recognized on a straight-line basis over the requisite service period. The Company has elected to account for forfeitures as incurred. If an employee forfeits nonvested shares subsequent to meeting a service condition, the previously recognized expense is not reversed. If an employee forfeits nonvested shares prior to meeting the service condition, the previously recognized expense is reversed.
As of September 27, 2024, these market conditions had not been met and as such these shares had not vested and were not included in the Company's basic or dilutive shares outstanding. The stock price appreciation equity program non-cash stock compensation expense was $0.6 million for both the quarter and nine months ended September 27, 2024. As of September 27, 2024, there was $29.1 million of total unrecognized non-cash stock based compensation expense which is expected to be recognized over a weighted-average period of 3.0 years.
The following tables summarize information about the Company’s stock price appreciation equity program awards described above:
Award Summary
Tranche
Grant Date Fair Value
Share Price Vesting Conditions*
Underlying Share #
Contractual Service Period
Derived Service Period
September 16, 2024
September 17, 2024
Both Grant Dates
21.26
22.85
>$30pershare
424,000
202,450
1 year
0.60 years
0.46 years
14.96
16.31
$30to$40pershare
2 years
2.00 years
1.86 years
9.93
11.03
$40to$50pershare
3 years
2.71 years
2.60 years
7. Stock Based Compensation (continued)
The following table summarizes the fair value assumption utilized in the lattice valuation model to calculate fair value:
Grant Date
Volatility
Risk Free Interest Rate
Dividend Yield
29.5
%
3.38
1.70
3.41
1.65
In connection with the acquisition of LeewayHertz (Note 1), the Company entered into an employment agreement with the selling shareholder and certain key employees by which the Company granted 439,453 restricted stock units, with either both performance and service requirements or just service requirements at a grant-date fair value of $25.86 per share with four year vesting terms. For the quarter and nine months ended September 27, 2024, the Company recorded $0.2 million of non-cash stock compensation expense.
During the quarter and nine months ended September 27, 2024, the Company issued 2,443,082 and 2,867,035 restricted stock units, respectively, at a weighted average grant date fair value of $18.11 and $18.89 per share, respectively. The grants issued during the quarter ended September 27, 2024, include the shares related to the stock price appreciation equity program and the shares issued in connection with the acquisition of LeewayHertz. As of September 27, 2024, the Company had 3,462,128 restricted stock units outstanding at a weighted average grant date fair value of $19.15 per share. As of September 27, 2024, $56.6 million of total restricted stock unit non-cash stock based compensation expense related to unvested awards had not been recognized and is expected to be recognized over a weighted average period of approximately 2.8 years, including the stock appreciation equity program awards discussed above.
Forfeitures for all of the Company’s outstanding equity awards are recognized as incurred.
8. Shareholders’ Equity
On July 30, 2002, the Company announced that its Board of Directors approved the repurchase of the Company’s common stock through its share repurchase program. Since the inception of the repurchase plan, the Board of Directors has approved the repurchase of $287.2 million of the Company’s common stock. As of September 27, 2024, the Company had affected cumulative purchases under the plan of $276.0 million, leaving $11.1 million available for future purchases. Subsequent to September 27, 2024, the Company's Board of Directors approved an additional $20.0 million increase to the Company's share repurchase program.
During the quarter ended September 27, 2024, the Company repurchased 65 thousand shares at an average price of $26.77 per share for a total cost of $1.7 million on the open market. The Company did not repurchase any outstanding stock on the open market during the quarter ended September 29, 2023. During the nine months ended September 27, 2024, the Company repurchased 108 thousand shares on the open market and from members of the Company's Board of Directors at an average price per share of $25.80 for a total cost of $2.8 million. During the nine months ended September 29, 2023, the Company repurchased 37 thousand shares from members of its Board of Directors at an average price per share of $18.96 for a total cost of $0.7 million.
There is no expiration of the Company's repurchase authorization. Under the repurchase plan, the Company may buy back shares of its outstanding stock either on the open market or through privately negotiated transactions, subject to market conditions and trading restrictions. The Company holds repurchased shares of its common stock as treasury stock and accounts for treasury stock under the cost method.
Shares purchased under the repurchase plan do not include shares withheld to satisfy withholding tax obligations. These withheld shares are never issued and in lieu of issuing the shares, taxes were paid on the employee’s behalf. During the quarter and nine months ended September 27, 2024, the Company withheld and did not issue 6 thousand shares and 174 thousand shares, respectively, for a cost of $0.1 million and $4.1 million, respectively. During the quarter and nine months ended
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8. Shareholders’ Equity (continued)
September 29, 2023, the Company withheld and did not issue 3 thousand shares and 171 thousand shares, respectively, for a cost of $66 thousand and $3.7 million, respectively. The shares withheld for taxes are included under issuance of common stock in the accompanying consolidated statements of shareholders’ equity.
Dividend Program
During the first nine months of 2024, the Company declared three quarterly dividends to its shareholders for an aggregate of $9.1 million, which were paid in April 2024, July 2024 and October 2024. These dividends were paid from U.S. domestic sources and are accounted for as a decrease to retained earnings. Subsequent to September 27, 2024, the Company declared its fourth quarter dividend in 2024 to be paid in January 2025.
9. Transactions with Related Parties
During the first nine months ended September 27, 2024, the Company repurchased 43 thousand shares of its common stock from members of its Board of Directors for $1.1 million, or $24.34 per share.
10. Litigation
The Company is involved in legal proceedings, claims, and litigation arising in the ordinary course of business not specifically discussed herein. In the opinion of management, the final disposition of such matters will not have a material adverse effect on the Company’s financial position, cash flows or results of operations.
11. Segment Information and Geographical Data
The Company has organized its operating and internal reporting structure to align with its primary market solutions. In accordance with ASC 280, the Company determined it has three operating segments and three reportable segments: (1) Global S&BT, (2) Oracle Solutions, and (3) SAP Solutions. Global S&BT includes the results of the Company’s strategic business consulting practices; Oracle Solutions includes the results of the Company’s Oracle EPM/ERP and Digital AMS practices; SAP Solutions includes the Company’s SAP applications and related SAP service offerings. The SAP Solutions reportable segment is the only segment that contains software sales revenue.
The measurement criteria for segment profit or loss are substantially the same for each reportable segment, excluding any unusual or infrequent items, if any. Segment profit consists of the revenue generated by a segment, less operating expenses that are incurred directly by the segment. Unallocated costs include corporate costs related to the administrative functions that are performed in a centralized manner and that are not attributable to a particular segment, depreciation and amortization expense, interest expense, non-cash compensation expense and any non-recurring transactions. Segment information related to assets has been omitted as the chief operating decision maker does not receive discrete financial information regarding assets at the segment level.
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11. Segment Information and Geographical Data (continued)
The tables below set forth information about the Company’s operating segments for the quarter and nine months ended September 27, 2024 and September 29, 2023, along with the items necessary to reconcile the segment information to the totals reported in the accompanying consolidated financial statements (in thousands):
Total revenue*
Segment profit
14,093
13,951
36,895
40,860
5,520
5,031
16,150
13,966
3,699
2,861
11,833
8,486
Total Company:
Total segment profit
23,312
21,843
64,878
63,312
Items not allocated to segment level:
Corporate general and administrative expenses**
5,655
4,497
15,745
15,069
Non-cash stock based compensation expense***
2,989
2,707
8,438
7,920
Stock price appreciation equity program compensation expense
602
Acquisition-related compensation expense
Acquisition-related non-cash stock based compensation expense
232
Acquisition-related costs
53
940
892
368
814
1,352
2,594
Income before taxes
*Total revenue includes reimbursable expenses, which are project travel-related expenses passed through to a client with no associated operating margin.
**Corporate general and administrative expenses primarily include costs related to business support functions including accounting and finance, human resources, legal, information technology and office administration, as well as any foreign currency gains and losses. Corporate general and administrative expenses exclude one-time, non-recurring expenses and benefits.
***See Note 7.
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The tables below set forth information on the Company's geographical data. Total revenue, which is primarily based on the country of the contracting entity, was attributed to the following geographical areas (in thousands):
United States
66,214
63,955
195,098
190,578
Europe
8,484
7,399
25,107
21,132
Other (Australia, Canada, India and Uruguay)
5,079
4,502
14,415
12,477
Long-lived assets are attributable to the following geographic areas (in thousands):
Long-lived assets:
100,210
91,065
15,152
14,481
539
444
Total long-lived assets
115,901
105,990
The domestic long-lived assets above include the provisional LeewayHertz allocation of goodwill of $4.5 million and intangible assets of $2.8 million. See Note 1. As of September 27, 2024 and December 29, 2023, foreign assets included $14.9 million and $14.3 million, respectively, of goodwill related to acquisitions.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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 transition our capabilities to support generative artificial intelligence ("A.I.")-related consulting services and solutions, our ability to effectively integrate acquisitions, including the LeewayHertz acquisition, into our operations,[our ability to manage joint ventures and successfully cooperate with our joint venture partners, 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.
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 A.I.") 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 A.I. XPLR offering which helps define an organizations’ Gen A.I. enablement opportunities. Using A.I. XPLR, our A.I. 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 A.I. 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):
Diluted net income per common share
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 third quarter and first nine 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 $79.8 million and $234.6 million during the third quarter and first nine months of 2024, respectively, as compared to $75.9 million and $224.2 million in the same periods in 2023, respectively. In the third quarter and first nine months of 2024, one customer accounted for 13% and 12%, respectively, of our total revenue. In the third quarter and first nine months of 2023, one customer accounted for 6% and 5%, respectively, of our total 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 Gen A.I. and Business Transformation 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):
21
Global S&BT total revenue was $44.1 million and $127.2 million during the third quarter and first nine months of 2024, respectively, as compared to $43.8 million and $129.8 million in the same periods of 2023, respectively. The revenue growth in our Gen A.I. consulting and implementation offerings were offset by weakness in our e-procurement implementation offerings.
Oracle Solutions total revenue was $22.8 million and $67.5 million during the third quarter and first nine months of 2024, respectively, as compared to $20.8 million and $58.8 million in the same periods of 2023, respectively. The segment has continued the momentum it has experienced since the second quarter of 2023.
SAP Solutions total revenue was $13.0 million and $40.0 million during the third quarter and first nine months of 2024, respectively, as compared to $11.2 million and $35.6 million in the same periods of 2023, respectively. The increase in revenue during the third quarter and first nine months of 2024, as compared to the same periods in 2023, was due to the strong software-related sales during the third quarter and first nine months of 2024.
Reimbursements as a percentage of Company total revenue were 2% during both the third quarter and first nine 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 $46.4 million and $137.6 million for the third quarter and first nine months of 2024, respectively, as compared to $44.4 million and $133.0 million in the same periods of 2023, respectively. The higher costs in the first nine months of 2024 were primarily a result of increased salaries, higher utilization of subcontractors and increases in non-cash stock compensation expense. Personnel costs as a percentage of total Company total revenue were 58% and 59% during the third quarter and first nine months of 2024, respectively, and 59% for each of the same periods in 2023, respectively.
Non-cash stock based compensation expense, included in personnel costs before reimbursable expenses was $2.1 million and $5.2 million during the third quarter and first nine months of 2024, respectively, as compared to $1.5 million and $4.7 million in the same periods of 2023, respectively. This increase was primarily related to increased non-cash stock compensation from the stock price appreciation equity program issuances (Note 7) and to the acquisition related non-cash stock compensation expense (Note 1 and Note 7).
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 14%, to $18.7 million, and 12%, to $55.0 million, for the third quarter and first nine months of 2024, respectively, as compared to $16.5 million and $49.3 million for the same periods in 2023, respectively. This increase in the costs during the third quarter and first nine months of 2024 was primarily due to the incremental investments we have made in sales and related expenses, increased commissions, increased incentive compensation commensurate with Company performance, increased non-cash stock based compensation, as well as foreign currency fluctuations. SG&A costs as a percentage of total Company revenue were 23% during both the third quarter and first nine months of 2024, respectively, as compared to 22% during the same periods in 2023.
Non-cash stock based compensation expense, included in SG&A, was $1.7 million and $4.1 million during the third quarter and first nine months of 2024, respectively, as compared to $1.2 million and $3.2 million for the same periods in 2023, respectively. The increase in the third quarter and first nine months of 2024 primarily relates to the non-cash stock compensation expense from the stock price appreciation equity program issuances (Note 7) .
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.
22
Global S&BT segment profit was $14.1 million and $37.0 million during the third quarter and first nine months of 2024, respectively, as compared to $14.0 million and $40.9 million for the same periods in 2023, respectively. This decrease in the first nine months of 2024 was primarily due to the revenue growth in our Gen A.I. consulting and implementation offerings more than offset by weakness in our e-procurement implementation offerings.
Oracle Solutions segment profit was $5.5 million and $16.2 million during the third quarter and first nine months of 2024, respectively, as compared to $5.0 million and $14.0 million for the same periods in 2023, respectively. The increase during the third quarter and first nine months of 2024 was primarily due to higher revenue, partially offset by increased headcount and increased usage of subcontractors.
SAP Solutions segment profit was $3.7 million and $11.8 million during the third quarter and first nine months of 2024, respectively, as compared to $2.9 million and $8.5 million for the same periods in 2023, respectively. The increase in segment profit in the third quarter and first nine months of 2024, as compared to the same period in 2023, was primarily due to the value-added reseller activity in the quarter, partially offset by higher commissions and sales related costs.
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 $0.4 million and $1.4 million during the third quarter and first nine months of 2024, respectively, as compared to $0.8 million and $2.6 million in the same periods in 2023, respectively. As of September 27, 2024, we had outstanding debt of $20.0 million, excluding debt issue costs. As of September 29, 2023, we had outstanding debt of $44.0 million, excluding debt issue costs.
Income Taxes. During the third quarter and first nine months of 2024, we recorded $3.8 million and $9.4 million of income tax expense, respectively, related to certain federal, foreign and state taxes which reflected an effective tax rate of 30.9% and 26.6%, respectively. During the third quarter and first nine months of 2023, we recorded $3.5 million and $8.9 million of income tax expense, respectively, related to certain federal, foreign and state taxes which reflected an effective tax rate of 27.1% and 25.3%, respectively.
Liquidity and Capital Resources
As of September 27, 2024 and December 29, 2023, we had $9.7 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 provided by operating activities
Cash flows used in investing activities
Cash flows used in financing activities
Cash Flows from Operating Activities
Net cash provided by operating activities was $27.1 million during the first nine months of 2024, as compared to $11.8 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, 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.
23
Cash Flows from Investing Activities
Net cash used in investing activities was $9.6 million during the first nine months of 2024, as compared to $3.2 million during the same period in 2023. During the third quarter of 2024, the Company acquired LeewayHertz for $6.5 million, net of cash acquired (see Note 1). During both the first nine months periods of 2024 and 2023, cash flows used in investing activities also included investments made to the continued development of our Hackett Connect Executive Advisory member platform, our QL benchmark, Digital Transformation technologies and our Gen A.I. platform, A.I. XPLR.
Cash Flows from Financing Activities
Net cash used in financing activities was $28.4 million and $29.0 million during the first nine months of 2024 and 2023, respectively. The usage of cash in 2024, primarily related to the repayment of borrowings of $13.0 million related to our Credit Facility, dividend payments of $9.1 million and the repurchase of $6.9 million of the Company's common stock. The usage of cash in 2023 primarily related to the net repayment of borrowings of $21.0 million related to our Credit Facility, dividend payments of $9.0 million and the repurchase of $4.4 million of the Company's common stock.
As of September 27, 2024, we had $20.0 million of outstanding borrowings under our Credit Facility, excluding deferred debt costs, leaving us with a capacity of approximately $80.0 million.
24
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of September 27, 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 nine months ended September 27, 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.
Item 4. Controls and Procedures
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.
Item 5. Other Information.
Rule 10b5-1 Trading Arrangements
During the three months ended September 27, 2024, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
During the quarter ended September 27, 2024, the Company repurchased 65 thousand shares at an average price of $26.77 per share for a total cost of $1.7 million. As of September 27, 2024, the Company had $11.1 million of authorization remaining under the repurchase plan. Subsequent to September 27, 2024, the Company's Board of Directors approved a $20.0 million increase to the share repurchase program.
Total Number
Maximum Dollar
of Shares as Part
Value That May
of Publicly
Yet be Purchased
Average Price
Announced
Under the
Period
of Shares
Paid per Share
Program
Balance as of June 28, 2024
12,883,015
June 29, 2024 to July 26, 2024
July 27, 2024 to August 23, 2024
August 24, 2024 to September 27, 2024
64,887
26.77
11,146,164
Shares repurchased during the quarter and nine months ended September 27, 2024 under the repurchase plan do not include 6 thousand shares and 174 thousand shares for a cost of $0.1 million and $4.1 million, respectively, that the Company bought back to satisfy employee net vesting obligations.
Item 6. Exhibits
Exhibit No.
Exhibit Description
3.1
Second Amended and Restated Articles of Incorporation of the Registrant, as amended (incorporated herein by reference to the Registrant's Form 10-K for the year ended December 29, 2000).
3.2
Articles of Amendment of the Articles of Incorporation of the Registrant (incorporated herein by reference to the Registrant's Form 10-K for the year ended December 28, 2007).
3.3
Amended and Restated Bylaws of the Registrant, as amended (incorporated herein by reference to the Registrant's Form 10-K for the year ended December 29, 2000).
3.4
Amendment to Amended and Restated Bylaws of the Registrant (incorporated herein by reference to the Registrant's Form 8-K filed on March 31, 2008).
3.5
Amendment to Amended and Restated Bylaws of the Registrant (incorporated herein by reference to the Registrant's Form 8-K filed on January 21, 2015).
10.1
Form of Performance-Based Stock Price Restricted Stock Award (incorporated herein by reference to Exhibit 10.1 of the Registrant's Form 8-K filed on September 16, 2024).
31.1*
Certification by CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification by CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document.
101.SCH**
Inline XBRL Taxonomy Extension Schema with embedded Linkbases Document.
104**
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* Filed herewith
** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 6, 2024
/s/ Robert A. Ramirez
Robert A. Ramirez
Executive Vice President, Finance and Chief Financial Officer