UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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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
The
(Exact name of registrant as specified in its charter)
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FLORIDA |
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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(Registrant’s telephone number, including area code)
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.
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).
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.
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Large Accelerated Filer |
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Non-Accelerated Filer |
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Smaller Reporting Company |
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Emerging Growth Company |
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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
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of July 31, 2020, there were
The Hackett Group, Inc.
TABLE OF CONTENTS
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Item 1. |
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Consolidated Balance Sheets as of June 26, 2020 and December 27, 2019 (unaudited) |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 6. |
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2
PART I — FINANCIAL INFORMATION
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ITEM 1. |
FINANCIAL STATEMENTS |
The Hackett Group, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
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June 26, |
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December 27, |
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2020 |
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2019 |
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ASSETS |
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Current assets: |
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Cash |
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$ |
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$ |
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Accounts receivable and unbilled revenue, net of allowance of $ |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Other assets |
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Goodwill |
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Operating lease right-of-use assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued expenses and other liabilities |
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Operating lease liabilities |
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Total current liabilities |
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Non-current deferred tax liability, net |
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Operating lease liabilities |
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Total liabilities |
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Commitments and contingencies |
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Shareholders’ equity: |
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Preferred stock, $ issued and outstanding |
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Common stock, $ |
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Additional paid-in capital |
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Treasury stock, at cost, and December 27, 2019, respectively |
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Accumulated deficit |
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Accumulated other comprehensive loss |
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Total shareholders' equity |
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Total liabilities and shareholders' equity |
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$ |
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$ |
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The accompanying notes are an integral part of the consolidated financial statements.
3
The Hackett Group, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
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Quarter Ended |
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Six Months Ended |
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June 26, |
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June 28, |
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June 26, |
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June 28, |
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2020 |
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2019 |
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2019 |
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REVENUE: |
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Revenue before reimbursements |
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$ |
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$ |
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$ |
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$ |
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Reimbursements |
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TOTAL REVENUE FROM CONTINUING OPERATIONS |
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COSTS AND EXPENSES: |
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Cost of service: |
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Personnel costs before reimbursable expenses |
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Stock compensation expense |
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Reimbursable expenses |
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TOTAL COST OF SERVICE |
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Selling, general and administrative costs |
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Stock compensation expense |
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Acquisition-related contingent consideration liability |
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— |
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— |
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Restructuring costs |
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— |
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— |
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TOTAL COSTS AND OPERATING EXPENSES |
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INCOME (LOSS) FROM OPERATIONS |
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Other expense: |
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Interest expense |
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INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
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Income tax (benefit) expense |
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INCOME (LOSS) FROM CONTINUING OPERATIONS |
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Loss from discontinued operations |
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— |
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NET INCOME (LOSS) |
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$ |
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$ |
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$ |
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$ |
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Basic net income (loss) per common share: |
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Income (loss) per common share from operations |
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$ |
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$ |
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$ |
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Weighted average common shares outstanding |
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Diluted net income (loss) per common share: |
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Income (loss) per common share from operations |
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$ |
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$ |
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$ |
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$ |
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Weighted average common and common equivalent share outstanding (3) |
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The accompanying notes are an integral part of the consolidated financial statements.
4
The Hackett Group, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
(unaudited)
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Quarter Ended |
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Six Months Ended |
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June 26, |
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June 28, |
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June 26, |
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June 28, |
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2020 |
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2019 |
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2020 |
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2019 |
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Net (loss) income |
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$ |
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$ |
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$ |
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$ |
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Foreign currency translation adjustment |
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Total comprehensive (loss) income |
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$ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of the consolidated financial statements.
5
The Hackett Group, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Six Months Ended |
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June 26, |
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June 28, |
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2020 |
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2019 |
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Cash flows from operating activities: |
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Net income |
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$ |
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$ |
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Less loss from discontinued operations |
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Net income from continuing operations |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation expense |
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Amortization expense |
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Amortization of debt issuance costs |
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Non-cash stock compensation expense |
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Provision for doubtful accounts |
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Gain on foreign currency translation |
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Release of valuation allowance |
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Changes in assets and liabilities: |
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Decrease (increase) in accounts receivable and unbilled revenue |
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(Increase) decrease in prepaid expenses and other assets |
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Decrease in accounts payable |
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Increase (decrease) in accrued expenses and other liabilities |
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Increase in income tax payable |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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Net cash used in investing activities |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock |
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Proceeds from borrowings |
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— |
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Repayment of borrowings |
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— |
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Dividends paid |
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Repurchase of common stock |
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Net cash used in financing activities |
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Effect of exchange rate on cash |
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Net increase in cash |
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Cash at beginning of period |
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Cash at end of period |
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$ |
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$ |
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Supplemental disclosure of cash flow information: |
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Cash paid for income taxes |
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$ |
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$ |
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Cash paid for interest |
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$ |
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$ |
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The accompanying notes are an integral part of the consolidated financial statements.
6
The Hackett Group, Inc.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)
(unaudited)
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Accumulated |
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Additional |
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Other |
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Total |
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Common Stock |
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Paid in |
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Treasury Stock |
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Accumulated |
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Comprehensive |
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Shareholders' |
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Shares |
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Amount |
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Capital |
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Shares |
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Amount |
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Deficit |
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Loss |
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Equity |
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Balance at December 27, 2019 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Issuance of common stock |
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— |
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— |
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— |
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( |
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Treasury stock purchased |
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— |
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— |
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— |
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( |
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— |
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— |
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Amortization of restricted stock units and common stock subject to vesting requirements |
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— |
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— |
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— |
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— |
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— |
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— |
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Dividends declared |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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Foreign currency translation |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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Balance at March 27, 2020 |
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$ |
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$ |
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( |
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$ |
( |
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$ |
( |
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|
$ |
( |
) |
|
$ |
|
|
|
Issuance of common stock |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Amortization of restricted stock units and common stock subject to vesting requirements |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Balance at June 26, 2020 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|||
|
|
|
Common Stock |
|
|
Paid in |
|
|
Treasury Stock |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Shareholders' |
|
||||||||||||||
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Shares |
|
|
Amount |
|
|
Deficit |
|
|
Loss |
|
|
Equity |
|
||||||||
|
Balance at December 28, 2018 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
Issuance of common stock |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Treasury stock purchased |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Amortization of restricted stock units and common stock subject to vesting requirements |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Balance at March 29, 2019 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
Issuance of common stock |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Treasury stock purchased |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Amortization of restricted stock units and common stock subject to vesting requirements |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
Balance at June 28, 2019 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
The accompanying notes are an integral part of the consolidated financial statements.
7
The Hackett Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 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 27, 2019, included in the Annual Report on Form 10-K filed by the Company with the SEC on March 5, 2020. The consolidated results of operations for the quarter and six months ended June 26, 2020, 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.
Revenue Recognition
The Company’s revenue is substantially generated from providing professional services to its clients. The Company also generates revenue from software licenses, software support, maintenance 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 they are 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 the Company 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 we satisfy 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 support, maintenance and subscriptions to our executive and best practice advisory programs are typically satisfied evenly over the course of the service period. Other performance obligations, such as software licenses, are satisfied at a point in time.
The Company generates its revenue under four types of billing arrangements: fixed-fee (including software license revenue); time-and-materials; executive and best practice advisory services; and software sales, 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 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-day terms.
Time-and-material billing arrangements require the client to pay based on the number of hours worked by the Company’s consultants at agreed upon 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 us 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-day terms.
8
The Hackett Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation and General Information (continued)
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 service contracts is recognized ratably over the life of the agreements. Customers are typically invoiced at the inception of the contract, with net thirty-day terms.
The resale of software and maintenance contracts are in the form of SAP America software license or maintenance agreements provided by SAP America. SAP is the principal and the Company is the agent in these transactions as the Company does not obtain title to the software and the software and maintenance are sold simultaneously. The transaction price is the Company’s agreed-upon percentage of the software license or maintenance amount in the contract with the vendor. Revenue for the resale of on-premise software licenses is recognized upon contract execution and customer’s receipt of the software. Revenue for the resale of cloud software licenses is recognized upon contract execution. Revenue from maintenance contracts is recognized ratably over the life of the agreements. The customer is typically invoiced at contract inception, with net thirty-day terms.
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.
The payment terms and conditions in our customer contracts vary. The agreements entered into in connection with a project, whether time-and-materials, fixed-fee or capped-fee based, typically allow clients to terminate early due to breach or for convenience with a 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
Sales tax collected from customers and remitted to the applicable taxing authorities is accounted for on a net basis, with no impact to revenue.
Differences between the timing of billings and the recognition of revenue are recognized as either unbilled services or deferred revenue in the accompanying consolidated balance sheets. Revenue recognized for services performed but not yet billed to clients are recorded as unbilled services. Revenue recognized, but for which are not yet entitled to bill because certain events, such as the completion of the measurement period, are recorded as contract assets and included within unbilled services. Client prepayments are classified as deferred revenue and recognized over future periods as earned in accordance with the applicable engagement agreement. See Note 3 for the accounts receivable and unbilled revenue balances and see Note 4 for the deferred revenue balances. During the quarter and six months ended June 26, 2020, the Company recognized $
The following table reflects the Company’s disaggregation of total revenue including reimbursable expenses for the quarters and six months ended June 26, 2020 and June 28, 2019:
|
|
|
Quarter Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
|
June 26, |
|
|
June 28, |
|
|
June 26, |
|
|
June 28, |
|
||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Consulting |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Software License Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue before reimbursements from continuing operations |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Capitalized Sales Commissions
Sales commissions earned by the Company’s sales force are considered 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 are generally less than
9
The Hackett Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation and General Information (continued)
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.
Fair Value
The Company’s financial instruments consist of cash, accounts receivable and unbilled revenue, accounts payable, accrued expenses and other liabilities and debt. As of June 26, 2020 and December 27, 2019, the carrying amount of each financial instrument approximated the instrument’s respective fair value due to the short-term nature and 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.
Business Combinations
The Company applies the provisions of ASC 805, Business Combinations, in the accounting for its acquisitions, which requires recognition of the assets acquired and the liabilities assumed at their acquisition date fair values, separately from goodwill. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition date fair values of the tangible and identifiable intangible assets acquired and liabilities assumed. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, its estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, that may be up to 12 months from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with a corresponding adjustment to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, the impact of any subsequent adjustments is included in the consolidated statements of operations.
Income Taxes
During the second quarter and first six months of 2020, the Company recorded an income tax benefit of $
COVID-19 Pandemic Impact on the Company’s Business
The level of revenue the Company can achieve is based on the Company’s ability to deliver market leading services and solutions and to deploy skilled teams of professionals quickly. The Company’s results of operations are affected by economic conditions, including macroeconomic conditions and levels of business confidence. In spite of some disruption in March 2020, the COVID-19 pandemic did not have a significant impact on the Company’s consolidated results of operations during the first quarter of 2020, however, it did negatively impact net revenue and dilutive earnings per share during the second quarter of 2020, and the Company expects for 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 the Company’s clients’ demand for its services.
10
The Hackett Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation and General Information (continued)
The Company is actively managing its business to respond to the impact of COVID-19. The Company has reduced employee travel to only essential business needs and its employees have been working from home. The Company is generally following the requirements and protocols published by the U.S. Centers for Disease Control and the World Health Organization, and state and local governments. The Company cannot predict when or how it will begin to lift the actions put in place.
As a response to the ongoing COVID-19 pandemic, the Company has implemented plans to manage its costs and preserve cash. The Company has significantly limited the addition of new employees and third party contracted services, eliminated all travel except where necessary to meet customer needs, and limited discretionary spending. In addition, at the end of June 2020, the Company reduced its global workforce by approximately
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 the Company’s financial condition and operating results remains highly uncertain.
Recently Issued Accounting Standards
In January 2017, the FASB issued ASU 2017-04, which eliminates Step 2 from the goodwill impairment test. For public companies, this update was effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for interim and annual goodwill impairment test with a measurement date after January 1, 2017. The adoption did not have a material impact on the Company’s consolidated financial statements.
In January 2020, the Company adopted ASU 2016-13 which changes how entities measure credit losses for most financial assets, including trade accounts receivable. The adoption did not have a material impact on the Company’s consolidated financial statements.
Reclassifications
Certain prior period amounts in the consolidated financial statements, and notes thereto, have been reclassified to conform to current period presentation.
2. Net (Loss) Income per Common Share
Basic net (loss) income per common share is computed by dividing net (loss) 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 (loss) income per common share is computed by dividing net (loss) income by the weighted average number of common shares outstanding, increased by the assumed conversion of other potentially dilutive securities during the period. For the period in which the Company has reported a net loss, diluted net loss per common share is the same as basic net loss per share attributable to common shareholders, because dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. As such, for the quarter ended June 26, 2020, the number of shares used in the calculation of dilutive weighted average common shares outstanding excludes
11
The Hackett Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. Net (Loss) Income per Common Share (continued)
The following table reconciles basic and dilutive weighted average common shares:
|
|
|
Quarter Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
|
June 26, |
|
|
June 28, |
|
|
June 26, |
|
|
June 28, |
|
||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Basic weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock units and common stock subject to vesting requirements issued to employees and non-employees |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issuable upon the exercise of stock options and SARs |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately
3. Accounts Receivable and Unbilled Revenue, Net
Accounts receivable and unbilled revenue, net, consisted of the following (in thousands):
|
|
|
June 26, |
|
|
December 27, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
Accounts receivable |
|
$ |
|
|
|
$ |
|
|
|
Unbilled revenue |
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
|
( |
) |
|
|
( |
) |
|
Accounts receivable and unbilled revenue, net |
|
$ |
|
|
|
$ |
|
|
Accounts receivable is net of uncollected advanced billings. Unbilled revenue represents 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):
|
|
|
June 26, |
|
|
December 27, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
Accrued compensation and benefits |
|
$ |
|
|
|
$ |
|
|
|
Deferred employer's portion of social security taxes |
|
|
|
|
|
|
- |
|
|
Accrued bonuses |
|
|
|
|
|
|
|
|
|
Accrued dividend payable |
|
|
|
|
|
|
|
|
|
Restructuring liability |
|
|
|
|
|
|
|
|
|
Deferred revenue |
|
|
|
|
|
|
|
|
|
Accrued sales, use, franchise and VAT tax |
|
|
|
|
|
|
|
|
|
Non-cash stock compensation accrual |
|
|
|
|
|
|
|
|
|
Income tax payable |
|
|
|
|
|
|
|
|
|
Other accrued expenses |
|
|
|
|
|
|
|
|
|
Total accrued expenses and other liabilities |
|
$ |
|
|
|
$ |
|
|
12
The Hackett Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. Accrued Expenses and Other Liabilities (continued)
Under the Coronavirus, Aid, Relief and Economic Security Act (the “CARES Act”), the Company has elected to defer its portion of social security tax deposits from March 27, 2020 through December 31, 2020,
5. Restructuring Costs
During the second quarter of 2020, the Company recorded restructuring costs of $
During 2019, the Company recorded restructuring costs of $
The following table sets forth the activity in the restructuring expense accruals (in thousands):
|
|
|
|
|
|
|
|
Exit, Closure and |
|
|
|
|
|
|
|
|
|
|
Severance and Other |
|
|
|
Consolidation |
|
|
|
|
|
|
||
|
|
|
Employee Costs |
|
|
|
of Facilities |
|
|
|
Total |
|
|||
|
Accrual balance at December 27, 2019 |
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
Additions |
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
Expenditures |
|
|
( |
) |
|
|
|
( |
) |
|
|
|
( |
) |
|
Accrual balance at March 27, 2020 |
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
Additions |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
Expenditures |
|
|
( |
) |
|
|
|
( |
) |
|
|
|
( |
) |
|
Accrual balance at June 26, 2020 |
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
6. Leases
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
The components of lease expense were as follows (in thousands):
|
|
|
June 26, 2020 |
|
|||||
|
|
|
Quarter |
|
|
Six Months |
|
||
|
Operating lease cost |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net lease costs |
|
$ |
|
|
|
$ |
|
|
13
The Hackett Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. Leases (continued)
The weighted average remaining lease term is
Future minimum lease payments under non-cancellable operating leases as of June 26, 2020, were as follows (in thousands):
|
2020 (excluding the six months ended June 26, 2020) |
|
$ |
|
|
|
2021 |
|
|
|
|
|
2022 |
|
|
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
2025 and thereafter |
|
|
|
|
|
Total lease payments |
|
|
|
|
|
Less imputed interest |
|
|
( |
) |
|
Total |
|
$ |
|
|
7. Credit Facility
The Company has a credit agreement with Bank of America, N.A. (“Bank of America”), which provides for borrowing up to $
On April 03, 2020, the Company amended the Credit Agreement with Bank of America to extend the maturity date to
The obligations of Hackett under the Revolver 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, a
As of June 26, 2020 and December 27, 2019, the Company did
The Company is subject to certain covenants, including total consolidated leverage, fixed cost coverage, adjusted fixed cost coverage and liquidity requirements, each as set forth in the Credit Agreement, subject to certain exceptions. As of June 26, 2020, the Company was in compliance with all covenants.
14
The Hackett Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
8. Stock Based Compensation
During the quarter and six months ended June 26, 2020, the Company issued
As of June 26, 2020, the Company had
Forfeitures for all of the Company’s outstanding equity awards are recognized as incurred.
9. Shareholders’ Equity
Stock Appreciation Rights (“SARs”)
As of June 26, 2020, the Company had
Treasury Stock
Under the Company’s share repurchase plan, the Company may repurchase shares of its outstanding common stock either on the open market or through privately negotiated transactions subject to market conditions and trading restrictions. During the quarter ended June 26, 2020, the Company did
During the quarter and six months ended June 28, 2019, the Company repurchased
The shares repurchased under the share repurchase plan during the quarter and six months ended June 26, 2020, do not include
Dividend Program
In 2019, the Company increased the annual dividend from $
Subsequent to June 26, 2020 and at its most recent meeting, the Company’s board of directors approved its second quarterly dividend for shareholders of record as of
10. Transactions with Related Parties
During the six months ended June 26, 2020, the Company bought back
15
The Hackett Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
11. 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.
12. Geographic and Group Information
Revenue before reimbursements, which is primarily based on the country of the contracting entity, was attributed to the following geographical areas (in thousands):
|
|
|
Quarter Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
|
June 26, |
|
|
June 28, |
|
|
June 26, |
|
|
June 28, |
|
||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Revenue before reimbursements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
International (primarily European countries) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from continuing operations before reimbursements |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Long-lived assets are attributable to the following geographic areas (in thousands):
|
|
|
June 26, |
|
|
December 27, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
Long-lived assets: |
|
|
|
|
|
|
|
|
|
North America |
|
$ |
|
|
|
$ |
|
|
|
International (primarily European countries) |
|
|
|
|
|
|
|
|
|
Total long-lived assets |
|
$ |
|
|
|
$ |
|
|
As of June 26, 2020 and December 27, 2019, foreign assets included $
13. Acquisitions
Jibe Consulting, Inc.
Effective
The sellers’ purchase consideration was $
The cash related to the contingent consideration, which was paid to the sellers, is not subject to service vesting and has been accounted for as part of the purchase consideration. The cash related to the contingent consideration, which was to be paid to the key employees, is subject to service vesting and was accounted for as compensation expense. Due to the projected earnout results, during the first quarter of 2019, the acquisition-related purchase consideration and compensation expense allocated to both the selling shareholders and key employees resulted in a benefit of $
16
|
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. We intend the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements. All statements regarding our expected financial position and operating results, our business strategy, our financing plans and forecasted demographic and economic trends relating to our industry are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as “may,” “will,” “anticipate,” “estimate,” “expect,” or “intend” and similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. We cannot promise you that our expectations reflected in such forward-looking statements will turn out to be correct. Factors that impact such forward-looking statements include, among others, the impact of the coronavirus (COVID-19) pandemic and changes in worldwide and U.S. economic conditions that impact business confidence and the demand for our products and services, our ability to mitigate or manage disruptions posed by COVID-19 pandemic, our ability to effectively integrate acquisitions into our operations, our ability to retain existing business, our ability to attract additional business, our ability to effectively market and sell our product offerings and other services, the timing of projects and the potential for contract cancellation by our customers, changes in expectations regarding the business consulting and information technology industries, our ability to attract and retain skilled employees, possible changes in collections of accounts receivable due to the bankruptcy or financial difficulties of our customers, risks of competition, price and margin trends, foreign currency fluctuations and changes in general economic conditions, interest rates and our ability to obtain additional debt financing if needed. For a discussion of risks and actions taken in response to the coronavirus pandemic, see “Our results of operations have been adversely affected and could in the future be materially adversely impacted by the coronavirus pandemic (COVID-19)” under Item 1A, “Risk Factors.”
An additional description of our risk factors is set forth in our Annual Report on Form 10-K for the year ended December 27, 2019. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Many of the risks, uncertainties and other factors identified in the Annual Report on Form 10-K have been amplified by the COVID-19 pandemic.
OVERVIEW
The Hackett Group, Inc. (“Hackett” or the “Company”) is a leading IP-based strategic advisory and technology consulting firm that enables companies to achieve world-class business performance. By leveraging the comprehensive Hackett database, the world’s leading repository of enterprise business process performance metrics and best practice intellectual capital, our business and technology solutions help clients improve performance and maximize returns on technology investments. Only Hackett empirically defines world-class performance in sales, general and administrative and certain supply chain activities with analysis gained through more than 17,850 benchmark and performance studies over 26 years at over 6,420 of the world’s leading companies.
In the following discussion, Strategy and Business Transformation Group includes the results of our North America IP as-a-service offerings, which include our Executive Advisory Programs and Benchmarking Services, and our Business Transformation Practices (S&BT). ERP, EPM and Analytics Solutions includes the results of our North America Oracle EEA and SAP Solutions Practices (EEA). International includes results of our S&BT and EEA Practices primarily in Europe.
COVID-19 Pandemic Impact on Our Business
The level of revenue we achieve is based on our ability to deliver market leading services and solutions and to deploy skilled teams of professionals quickly. Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business confidence. In spite of some disruption in March 2020, the COVID-19 pandemic did not have a significant impact on our consolidated results of operations during the first quarter of 2020, however, net revenue and dilutive earnings per share were negatively impacted in the second quarter 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 our employees have been working remotely from home. We are generally following the requirements and protocols published by the U.S. Centers for Disease Control and the World Health Organization, and state and local governments. We cannot predict when or how we will begin to lift the actions put in place.
17
As a response to the ongoing COVID-19 pandemic, we have implemented plans to manage our costs and preserve cash. We have significantly limited the addition of new employees and third party contracted services, eliminated all travel except where necessary to meet customer needs, and limited discretionary spending. In addition, at the end of June 2020, we reduced our global workforce by approximately 10% of our global workforce and recorded a $5.0 million restructuring charge. All client concessions and accounts receivable allowances have been appropriately reflected in our financial statements. To the extent the business disruption continues for an extended period, additional cost management actions will be considered. Any future asset impairment charges, increases in allowance for doubtful accounts, or restructuring charges will be dependent on the severity and duration of the pandemic.
In light of the evolving health, social, economic and business environment, governmental regulations or mandates, and business disruptions that could occur, the potential impact that COVID-19 could have on our financial condition and operating results remains highly uncertain.
For more information, see “Our results of operations have been adversely affected and could in the future be materially adversely impacted by the coronavirus pandemic (COVID-19).” under Item 1A, “Risk Factors.”
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, our results of operations and the percentage relationship to revenue before reimbursements of such results (in thousands and unaudited):
|
|
|
Quarter Ended |
|
|
Six Months Ended |
|
||||||||||||||||||||||||||
|
|
|
June 26, |
|
|
June 28, |
|
|
June 26, |
|
|
June 28, |
|
||||||||||||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||||||||||||||||||
|
REVENUE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue before reimbursements |
|
$ |
52,632 |
|
|
|
100.0 |
% |
|
$ |
67,976 |
|
|
|
100.0 |
% |
|
$ |
117,818 |
|
|
|
100.0 |
% |
|
$ |
130,346 |
|
|
|
100.0 |
% |
|
Reimbursements |
|
|
119 |
|
|
|
|
|
|
|
5,545 |
|
|
|
|
|
|
|
4,466 |
|
|
|
|
|
|
|
10,330 |
|
|
|
|
|
|
TOTAL REVENUE |
|
|
52,751 |
|
|
|
|
|
|
|
73,521 |
|
|
|
|
|
|
|
122,284 |
|
|
|
|
|
|
|
140,676 |
|
|
|
|
|
|
COST AND EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs before reimbursable expenses |
|
|
38,654 |
|
|
|
73.4 |
% |
|
|
40,820 |
|
|
|
60.1 |
% |
|
|
79,767 |
|
|
|
67.7 |
% |
|
|
79,754 |
|
|
|
61.2 |
% |
|
Stock compensation expense |
|
|
1,600 |
|
|
|
|
|
|
|
1,022 |
|
|
|
|
|
|
|
2,941 |
|
|
|
|
|
|
|
1,942 |
|
|
|
|
|
|
Acquisition-related compensation expense (benefit) |
|
|
29 |
|
|
|
|
|
|
|
(159 |
) |
|
|
|
|
|
|
29 |
|
|
|
|
|
|
|
(288 |
) |
|
|
|
|
|
Acquisition-related non-cash stock compensation expense |
|
|
259 |
|
|
|
|
|
|
|
289 |
|
|
|
|
|
|
|
512 |
|
|
|
|
|
|
|
368 |
|
|
|
|
|
|
Reimbursable expenses |
|
|
119 |
|
|
|
|
|
|
|
5,545 |
|
|
|
|
|
|
|
4,466 |
|
|
|
|
|
|
|
10,330 |
|
|
|
|
|
|
TOTAL COST OF SERVICE |
|
|
40,661 |
|
|
|
|
|
|
|
47,517 |
|
|
|
|
|
|
|
87,715 |
|
|
|
|
|
|
|
92,106 |
|
|
|
|
|
|
Selling, general and administrative costs |
|
|
11,413 |
|
|
|
21.7 |
% |
|
|
15,159 |
|
|
|
22.3 |
% |
|
|
25,310 |
|
|
|
21.5 |
% |
|
|
29,201 |
|
|
|
22.4 |
% |
|
Non-cash stock compensation expense |
|
|
483 |
|
|
|
|
|
|
|
787 |
|
|
|
|
|
|
|
1,119 |
|
|
|
|
|
|
|
1,492 |
|
|
|
|
|
|
Amortization of intangible assets |
|
|
238 |
|
|
|
|
|
|
|
254 |
|
|
|
|
|
|
|
476 |
|
|
|
|
|
|
|
553 |
|
|
|
|
|
|
Acquisition-related contingent consideration liability |
|
|
— |
|
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
(1,025 |
) |
|
|
|
|
|
Restructuring costs |
|
|
5,034 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
5,034 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
TOTAL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |
|
|
17,168 |
|
|
|
|
|
|
|
16,245 |
|
|
|
|
|
|
|
31,939 |
|
|
|
|
|
|
|
30,221 |
|
|
|
|
|
|
TOTAL COSTS AND OPERATING EXPENSES |
|
|
57,829 |
|
|
|
|
|
|
|
63,762 |
|
|
|
|
|
|
|
119,654 |
|
|
|
|
|
|
|
122,327 |
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS |
|
|
(5,078 |
) |
|
|
-9.6 |
% |
|
|
9,759 |
|
|
|
14.4 |
% |
|
|
2,630 |
|
|
|
2.2 |
% |
|
|
18,349 |
|
|
|
14.1 |
% |
|
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(41 |
) |
|
|
|
|
|
|
(105 |
) |
|
|
|
|
|
|
(78 |
) |
|
|
|
|
|
|
(206 |
) |
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
|
|
(5,119 |
) |
|
|
-9.7 |
% |
|
|
9,654 |
|
|
|
14.2 |
% |
|
|
2,552 |
|
|
|
2.2 |
% |
|
|
18,143 |
|
|
|
13.9 |
% |
|
Income tax (benefit) expense |
|
|
(1,186 |
) |
|
|
-2.3 |
% |
|
|
2,614 |
|
|
|
3.8 |
% |
|
|
950 |
|
|
|
0.8 |
% |
|
|
4,054 |
|
|
|
3.1 |
% |
|
INCOME (LOSS) FROM CONTINUING OPERATIONS (NET OF TAXES) |
|
|
(3,933 |
) |
|
|
|
|
|
|
7,040 |
|
|
|
|
|
|
|
1,602 |
|
|
|
|
|
|
|
14,089 |
|
|
|
|
|
|
Loss from discontinued operations |
|
|
— |
|
|
|
|
|
|
|
(51 |
) |
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
(3,933 |
) |
|
|
-7.5 |
% |
|
$ |
6,989 |
|
|
|
10.3 |
% |
|
$ |
1,594 |
|
|
|
1.4 |
% |
|
$ |
14,083 |
|
|
|
10.8 |
% |
|
Diluted net (loss) income per common share |
|
$ |
(0.13 |
) |
|
|
|
|
|
$ |
0.22 |
|
|
|
|
|
|
$ |
0.05 |
|
|
|
|
|
|
$ |
0.44 |
|
|
|
|
|
Revenue. We are a global company with operations located in the United States and Western Europe. Our revenue is denominated in multiple currencies, primarily the U.S. Dollar, British Pound and Euro, and as a result is affected by currency exchange rate fluctuations. The impact of currency fluctuations did not have a significant impact on comparisons between the quarter and six months ended June 26, 2020 and the comparable periods of 2019. Revenue is analyzed based on geographical location of engagement team personnel.
18
The following table sets forth revenue by group for the periods indicated (in thousands):
|
|
|
Quarter Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
|
June 26, |
|
|
June 28, |
|
|
June 26, |
|
|
June 28, |
|
||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
S&BT |
|
$ |
16,798 |
|
|
$ |
26,261 |
|
|
$ |
41,260 |
|
|
$ |
50,582 |
|
|
EEA |
|
|
31,399 |
|
|
|
31,005 |
|
|
|
64,622 |
|
|
|
58,744 |
|
|
International |
|
|
4,435 |
|
|
|
10,710 |
|
|
|
11,936 |
|
|
|
21,020 |
|
|
Revenue from continuing operations before reimbursements |
|
$ |
52,632 |
|
|
$ |
67,976 |
|
|
$ |
117,818 |
|
|
$ |
130,346 |
|
Our total Company net revenue from continuing operations, or revenue before reimbursements, decreased 23% to $52.6 million, and 10% to $117.8 million in the second quarter and first six months of 2020, respectively, as compared to $68.0 million and $130.3 million, in the same periods of 2019. Net revenues and reimbursable expenses were both affected as the economic disruption from the COVID-19 pandemic interrupted travel and as we transitioned to a remote service delivery model throughout the US and Europe. In the second quarter and first six months of 2020, one customer accounted for 6% and 5%, respectively, of our total revenue. In both periods in 2019, no customer accounted for more than 5% of our total revenue.
S&BT net revenue was $16.8 million and $41.3 million during the second quarter and first six months of 2020, respectively, as compared to $26.3 million and $50.6 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 increased to $31.4 million and to $64.6 million during the second quarter and first six months of 2020, respectively, as compared to $31.0 million and $58.7 million in the same periods of 2019, respectively. This increase was driven by strong growth from our SAP S4 HANA implementation and Reseller practices, and growth from our Oracle Cloud ERP and OneStream Practices.
Hackett US net revenue from continuing operations represented 92% and 90% of our total Company net revenue during the second quarter and first six months of 2020, respectively, and decreased 16% and 3%, respectively, when compared to the same periods in 2019.
Hackett international net revenue from continuing operations was $4.4 million and $11.9 million in the second quarter and first six months of 2020, respectively, as compared to $10.7 million and $21.0 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 8% and 10% of total Company net revenue during both the second quarter and first six months of 2020, respectively, as compared to 16% for the same periods in 2019.
Reimbursements as a percentage of total net revenue were 0% and 4% during the second quarter and first six months of 2020, respectively, as compared to 8.0% for both of the same 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 5%, to $38.7 million from $40.8 million for the second quarter of 2020, as compared to the same period in 2019. Personnel costs were comparable between the first six months of 2020 and 2019. The decrease in personnel costs in the second quarter 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 73% and 68% for the second quarter and first six months of 2020, respectively, as compared to 60% and 61% for the same periods of 2019, respectively.
Non-cash stock compensation expense was $1.6 million and $2.9 million for the second quarter and first six months of 2020, respectively, as compared to $1.0 million and $1.9 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.
Acquisition related non-cash stock compensation expense in 2020 and 2019 related to equity awards issued in relation to acquisitions between 2014 and 2017.
19
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 $11.4 million and $25.3 million for the second quarter and first six months of 2020, respectively, as compared to $15.2 million and $29.2 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 all periods presented.
Non-cash stock compensation expense was $0.5 million and $1.1 million for the second quarter and first six months of 2020, respectively, as compared to $0.8 million and $1.5 million for the same periods in 2019, respectively.
Amortization expense was $0.2 million and $0.5 million in the second quarter and first six months of 2020, respectively, as compared to $0.3 million and $0.6 million in the same periods in 2019, respectively. The amortization expense in 2020 and 2019 related to the amortization of the intangible asset acquired in our acquisitions and the buyout of our partner’s joint venture interest in the CGBS Training and Certification Programs in 2017. The intangible assets related to the acquisitions will continue to amortize until 2022 and the intangible assets related to the joint venture will continue to amortize until 2021.
Acquisition-related Contingent Consideration Liability. During the first quarter of 2019, the liability related to the cash portion of the Jibe acquisition contingent consideration due to the selling shareholders, which was not subject to vesting, resulted in a benefit due to the reduction of the contingent earnout liability. This liability was settled in the fourth quarter of 2019.
Restructuring Costs. During the second quarter of 2020, we recorded restructuring costs of $5.0 million, which was primarily related to the reduction of staff in the United States and Europe as a result of the impact of the COVID-19 pandemic.
During 2019, we recorded restructuring costs of $3.3 million, which was primarily related to the reduction of staff in Europe and Australia.
Income Taxes. During the second quarter and six months of 2020, we recorded an income tax benefit of $1.2 million and income tax expense of $950 thousand, respectively, related to certain federal, foreign and state taxes which reflected an effective tax rate benefit of 23% and expense of 37%, respectively. In the second quarter of and six months of 2019, we recorded income tax expense of $2.6 million and $4.1 million, respectively, related to certain federal, foreign and state taxes which reflected an effective tax rate of 27% and 22%, respectively. The increase in the six months ending June 26, 2020 GAAP income tax rate is primarily due to a lower tax benefit related to share based compensation when compared to the same period in the prior year, restructuring charges in the quarter ended June 26, 2020 in countries with lower statutory income tax rates and changes in the Company’s overall profitability due to the impact of the COVID-19 pandemic.
Liquidity and Capital Resources
As of June 26, 2020, and December 27, 2019, we had $37.4 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):
|
|
|
Six Months Ended |
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|||||
|
|
|
June 26, |
|
|
June 28, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
Cash flows provided by operating activities |
|
$ |
21,068 |
|
|
$ |
18,032 |
|
|
Cash flows used in investing activities |
|
$ |
(1,349 |
) |
|
$ |
(2,819 |
) |
|
Cash flows used in financing activities |
|
$ |
(8,400 |
) |
|
$ |
(12,432 |
) |
Cash Flows from Operating Activities
Net cash provided by operating activities was $21.1 million during the first six months of 2020, as compared to $18.0 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 unbilled revenue 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 total net income adjusted
20
for non-cash items, partially offset by a decrease in accounts payable and accrued expenses and liabilities after the payout of incentive compensation.
Cash Flows from Investing Activities
Net cash used in investing activities was $1.3 million and $2.8 million during the first six months of 2020 and 2019, respectively. During 2020, cash flows used in investing activities included investments related to the development of our Quantum Leap benchmark technology. 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 $8.4 million and $12.4 million during the first six months 2020 and 2019, respectively. The usage of cash in 2020 primarily related to the dividend payment of $5.8 million and the repurchase of $3.0 million of our Company common stock. The usage of cash in 2019 was primarily related to the dividend payment of $5.4 million, the repurchase of $5.4 million of our Company common stock and the net payments made under the Revolver of $2.0 million.
As of June 26, 2020, we did not have any outstanding borrowings under the Revolver, leaving us with a capacity of approximately $45.0 million. See Note 7, “Credit Facility,” to our consolidated financial statements included in this Quarterly Report on Form 10-Q for more information.
Recently Issued Accounting Standards
For a discussion of recently issued accounting standards, see Note 1, “Basis of Presentation and General Information,” to our consolidated financial statements included in this Quarterly Report on Form 10-Q and Note 1, “Basis of Presentation and General Information,” to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 27, 2019.
21
|
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk. |
As of June 26, 2020, our exposure to market risk related primarily to changes in interest rates and foreign currency exchange rate risks.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to the Revolver, which is subject to variable interest rates. The interest rates per annum applicable to loans under the Revolver will be, at our option, equal to either a base rate or a LIBOR rate for one-, two-, three- or nine-month interest periods chosen by us in each case, plus an applicable margin percentage. A 100-basis point increase in our interest rate under our Revolver would not have had a material impact on our results of operations for the quarter and six months ended June 26, 2020.
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 and the Euro. 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 Controls
There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
22
PART II — OTHER INFORMATION
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Item 1. |
Legal Proceedings. |
We are 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 our financial position, cash flows or results of operations.
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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 27, 2019 (the “Annual Report”).
Our results of operations have been adversely affected and could in the future be materially adversely impacted by the coronavirus pandemic (COVID-19).
The global spread of the coronavirus (COVID-19) has created significant volatility, uncertainty and economic disruption. Our clients, and therefore our business and revenues, are sensitive to negative changes in general economic conditions and business confidence. We expect that the negative impacts of the COVID-19 pandemic on our operating revenue may continue until economic conditions improve.
We continue to work with our clients and employees to responsibly address this global pandemic. We will continue to monitor the situation and assess possible implications to our business and our clients and employees and will take appropriate actions in an effort to mitigate adverse consequences. We cannot assure you that we will be successful in any such mitigation efforts. The extent to which the coronavirus pandemic impacts our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration, severity and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the impact of the pandemic on economic activity and actions taken in response; the effect on our clients and client demand for our services and solutions; the ability of our clients to pay for our services and solutions; and any closures of our clients’ offices and facilities. Clients may also slow down decision making, delay planned work or seek to terminate existing agreements. Any of these events could cause or contribute to the risks and uncertainties enumerated in “Item 1A. Risk Factors” and elsewhere in the Annual Report and could materially adversely affect our business, financial condition, results of operations and/or stock price.
|
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds. |
Issuer Purchases of Equity Securities
During the quarter ended June 26, 2020, the Company did not repurchase shares of its common stock under the repurchase plan approved by the Company's Board of Directors. During the six months ended June 26, 2020, the Company repurchased 73 thousand shares of its common stock under the repurchase plan approved by the Company's Board of Directors for $1.0 million at an average share price of $13.79. As of June 26, 2020, the Company had $5.6 million of authorization remaining under the repurchase plan.
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|
Total Number |
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|
Maximum Dollar |
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||
|
|
|
|
|
|
|
|
|
|
|
of Shares as Part |
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|
Value That May |
|
||
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|
|
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|
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|
|
|
of Publicly |
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|
Yet be Purchased |
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||
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|
|
Total Number |
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|
Average Price |
|
|
Announced |
|
|
Under the |
|
||||
|
Period |
|
of Shares |
|
|
Paid per Share |
|
|
Program |
|
|
Program |
|
||||
|
Balance as of March 27, 2020 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
5,644,867 |
|
|
March 28, 2020 to April 24, 2020 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
5,644,867 |
|
|
April 25, 2020 to May 22, 2020 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
5,644,867 |
|
|
May 23, 2020 to June 26, 2020 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
5,644,867 |
|
|
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
|
|
Shares repurchased during the quarter and six months ended June 26, 2020 under the repurchase plan approved by the Company's Board of Directors do not include 2 thousand shares and 127 thousand shares, respectively, for a cost of $25 thousand and $2.0 million, respectively, that the Company bought back to satisfy employee net vesting obligations.
23
|
Item 6. |
Exhibits |
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Exhibit No. |
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Exhibit Description |
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3.1 |
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3.2 |
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3.3 |
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3.4 |
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||
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3.5 |
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||
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10.1 |
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||
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10.2 |
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||
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31.1* |
|
Certification by CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2* |
|
Certification by CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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|
|
|
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|
|
32* |
|
||
|
|
|
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|
|
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. |
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101.SCH** |
|
Inline XBRL Taxonomy Extension Schema Document |
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101.CAL** |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF** |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB** |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE** |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
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|
|
|
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|
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. |
24
SIGNATURES
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.
|
|
|
The Hackett Group, Inc. |
|
|
|
|
|
Date: August 5, 2020 |
|
/s/ Robert A. Ramirez |
|
|
|
Robert A. Ramirez |
|
|
|
Executive Vice President, Finance and Chief Financial Officer |
25