ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Annual Report on Form 10-K. We have omitted discussion of fiscal 2020 items and year-to-year comparisons between fiscal years 2021 and 2020 where it would be redundant with the discussion previously included in Part II, Item 7 (MD&A) of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Hackett, originally incorporated on April 23, 1997, 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 over 25,000 benchmark and performance studies over 29 years at over 8,800 of the world’s leading companies.
Hackett’s combined capabilities include executive advisory programs, IPaaS, market intelligence, benchmarking, business transformation and technology solutions, with corresponding offshore support. In addition, we are identifying new opportunities for our benchmarking and best practice intellectual property by leveraging new channels through strategic alliances to introduce new recurring revenue, high margin offerings that could redefine our organizational model that we have started to refer to as “IP-as-a-Service” business.
Critical Accounting Policies and Estimates
In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of results of operations and financial position in conformity with generally accepted accounting principles in the United States (“GAAP”). Actual results could differ from those estimates under different assumptions and conditions. We believe the following discussion addresses our most critical accounting policies that have had or are reasonably likely to have a material impact on our financial condition or results of operations. These policies require management to exercise judgment on issues that are often difficult, subjective and complex due to the necessity of estimating the effect of matters that are inherently uncertain.
Revenue Recognition
Determining revenue recognition requires management to exercise judgment on the interpretation of service contracts which may include one or multiple performance obligations. The judgement management must make include determining whether the control of the goods and services provided are transferred to our customers at a point in time or over the course of the service period utilizing a proportionate performance approach.
In fixed-fee billing arrangements, which would also include contracts with capped fees, we set the fees based on our estimates of the costs and timing for completing the engagements. We generally recognize 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 based on the best available information. If our estimates indicate a potential loss, such loss is recognized in the period in which the loss first becomes probable and reasonably estimable.
Allowances for Doubtful Accounts
Periodically, we review accounts receivable to assess our estimates of collectability. When establishing allowances for doubtful accounts, management must base their judgment on the information available at that point in time, which may include historical experiences, current economic trends and client credit worthiness, to determine the likelihood of collectability.
Segment Reporting
Segments are defined as components of a company that engage in business activities from which they may earn revenues 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. Effective in the third quarter of 2022, the Company re-assessed its operating segments under the management approach in accordance with ASC 280, Segment Reporting (ASC 280) and has determined that effective in the third quarter of 2022, it has three operating segments: Global Strategy &
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Business Transformation ("Global S&BT"), Oracle Solutions and SAP Solutions. Global S&BT includes S&BT Consulting, Benchmarking, Executive Advisory Services, IPaaS and OneStream. Oracle Solutions and SAP Solutions support the two fundamentally distinct ERP systems: Oracle and SAP. See Note 15 “Segment Information and Geographic 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. Effective in the third quarter of fiscal year 2022, the Company reorganized its operating and internal reporting structure to better align with its primary market solutions. Due to the reorganization and 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 strategic business consulting groups; Oracle Solutions includes the results of the Company’s Oracle EPM/ERP and AMS groups; 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.With the new reporting unit structure, the goodwill previously assigned to Hackett Technology Solutions and The Hackett Group has now been allocated based on the reporting unit's relative fair value. The carrying amount of goodwill by the new reporting units are as follows (in thousands):
Foreign
December 31, Additions/ Currency December 30,
Income Taxes
Management’s judgement is required in the calculation of the income tax provision. Deferred tax assets and liabilities are measured by using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to reverse. A valuation allowance is provided if management believes it is more likely than not that all or some portion of the deferred tax asset will not be realized. An increase or decrease in the valuation allowance may result from a change in circumstances, and therefore a change in management’s judgment about the realizability of the related deferred tax asset.
Management adopted a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return in regards to the de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.
Please refer to Note 1 “Basis of Presentation and General Information” to our consolidated financial statements included in our Annual Report on Form 10-K for the discussion of all of our critical accounting policies.
Results of Operations
Our fiscal year generally consists of a 52-week period and periodically consists of a 53-week period as each fiscal year ends on the Friday closest to December 31. Fiscal years 2022 and 2021 ended on December 30, 2022 and December 31, 2021, respectively. References to a year included in this document refer to a fiscal year rather than a calendar year.
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The following table sets forth, for the periods indicated, our results of operations (in thousands):
Year Ended
December 30, December 31,
Revenue:
Costs and expenses:
Cost of service:
Restructuring and asset impairment settlement (651 ) —
Other expense, net:
Interest expense, net (144 ) (95 )
Income from continuing operations before income taxes 55,104 46,381
Loss from discontinued operations (net of taxes) — (7 )
Comparison of 2022 to 2021
Overview. For fiscal year 2022, total revenue increased 5% to $293.7 million, as compared to fiscal year 2021, primarily driven by increased total revenue from our Global S&BT segment of 16%, or $23.4 million, as compared to 2021. Diluted earnings per share increased to $1.28 in 2022 from $1.26 in 2021. Fiscal year 2021 results included a $5.3 million software sale transaction which was recorded in the second quarter of 2021 and a tax benefit of $7.7 million for the exercise of 2.9 million SARs which was recorded in the fourth quarter of 2021. Together, these items positively impacted net income for 2021 by $13.0 million and dilutive earnings per share by $0.33.
Revenue. We are a global company with operations primarily 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 the currency fluctuation did not have a significant impact on comparisons between 2022 and 2021. Revenue is analyzed based on geographic location of engagement team personnel.
Our total revenue from continuing operations increased 5%, to $293.7 million in 2022, as compared to $278.8 million in 2021. The 2021 revenue included a $5.3 million software sale transaction which was recorded in the second quarter of 2021 as mentioned above.
In 2022 one customer accounted for 7% of our total revenue and in 2021 no customer accounted for more than 5% of our total revenue.
Segment revenue. Effective in the third quarter of 2022, the Company reorganized its operating and internal reporting structure to better align with its primary market solutions. Due to the reorganization, management made the determination to present three reportable segments: Global S&BT, Oracle Solutions and SAP Solutions. Global S&BT includes S&BT Consulting, Benchmarking, Advisory Services, Intellectual Property as-a-Service (IPASS) and OneStream. Oracle Solutions and SAP Solutions support the two fundamentally distinct ERP systems: Oracle and SAP.
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The following table sets forth total revenue by reportable operating segment, which includes reimbursable expenses related to project travel-related expenses passed through to a client with no associated operating margin (in thousands):
Year Ended
December 30, December 31,
Global S&BT total revenue increased 16% in 2022, to $169.7 million, as compared to $146.2 million in 2021 reflecting the continued sequential growth since the second quarter of 2020 and continuing demand for digital transformation investments. Global S&BT represented 58% of the Company's total revenue. In addition to solid performance from our transformation consulting groups, our IP-based higher-margin Executive Advisory, IPaaS and Market Intelligence offerings grew more than 20%. Our annualized contract value from the segment recurring revenues also grew over 20%. The success and market opportunity for our IP offerings highlight the reasons why we have accelerated our sales and product development investments in this area.
Oracle Solutions total revenue increased to $76.3 million in 2022, as compared to $74.9 million in 2021. Our Oracle Solutions segment revenues were slightly up for the year as the group struggled to maintain its early year momentum. Although client activity remains strong this was the segment where we experienced the most volatility in client decision in the second half of the year.
SAP Solutions total revenue decreased to $47.8 million in 2022, from $57.7 million in 2021. Total SAP Solutions revenue in 2021 included a $5.3 million software sale transaction which was recorded in the second quarter of 2021. The decrease in revenue in 2022 as compared to 2021, excluding the software sale transaction, was primarily the result of strong 2021 results which benefitted from several large global engagements with larger than normal subcontractor levels, partially offset by strong software transaction activity in the third and fourth quarters of 2022.
Reimbursements as a percentage of total revenue were 1.4% in 2022 and 0.4% in 2021. Reimbursements are project travel-related expenses passed through to a client with no associated operating margin. We have experienced increased client-related travel since the transition to a remote delivery model, however we do not expect reimbursements to return to pre-pandemic levels.
Cost of Service. Cost of service consists of personnel costs before reimbursable expenses, which includes salaries, benefits and incentive compensation for consultants and subcontractor fees, acquisition-related cash and stock compensation costs, non-cash stock 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, increased slightly to $174.1 million in 2022, as compared to $171.9 million in 2021. The higher costs in 2022 were primarily a result of hiring activities to support business growth. Personnel costs as a percentage of total revenue decreased to 59% in 2022 from 62% in 2021.
Non-cash stock-based compensation expense, included in personnel costs before reimbursable expenses, was $6.2 million in 2022, as compared to $6.4 million in 2021.
Acquisition related non-cash stock-based compensation expense, included in personnel costs before reimbursable expenses, was $15 thousand in 2022, as compared to $406 thousand in 2021. This cost was related to equity issued in relation to acquisitions which has vested over the years resulting in lower compensation expense.
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 increased 3%, to $61.0 million in 2022, as compared to $59.2 million in 2021. This increase in the costs was primarily due to increased non-client billable expenses and increased investments in sales and marketing and information technology. SG&A costs as a percentage of total revenue were 21% during both 2022 and 2021.
Non-cash stock-based compensation expense, included in SG&A, was $4.1million in 2022, as compared to $3.4 million in 2021. The increase in the compensation expense in 2022 is due to higher incentive compensation expense commensurate with Company performance.
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Amortization expense, included in SG&A, was $0.2 million in 2022, as compared to $1.0 million in 2021. The amortization expense related to the amortization of the intangible asset acquired in our acquisitions and the buyout of our partner’s joint venture interest in the CGBS Training and Certification Programs in 2017. The intangible assets related to the acquisitions have been fully amortized as of the second quarter of 2022.
Segment Profit. Segment profit consists of the revenue generated by the segment, less the direct costs of revenue and selling, general and administrative expenses that are incurred directly by the segment. Items not allocated to the segment level include corporate costs related to administrative functions that are performed in a centralized manner that are not attributable to a particular segment. These administrative function costs include corporate general and administrative expenses, non-cash compensation, depreciation and amortization expense, interest expense and the restructuring charges and reversals.
Global S&BT segment profit increased to $61.3 million in 2022, as compared to $49.3 million in 2021. This increase was primarily a result of increased revenue from our higher margin executive advisory, IPaaS and market intelligence offerings, which grew more than 20%, as discussed above.
Oracle Solutions segment profit decreased slightly to $15.3 million in 2022, as compared to $15.7 million in 2021. On the operating side, we continued to expand the segment offshore leverage throughout the year and also added senior sales and practice leaders in the latter part of the year to strengthen our team.
SAP Solutions segment profit decreased to $12.8 million in 2022, as compared to $18.8 million in 2021. SAP Solutions segment profit in 2021 included a $5.3 million software sales transaction. Although total revenue was down, the segment reported solid segment profits for the year aided by increasing software activity.
Income Taxes. During 2022, we recorded $14.3 million of income tax expense related to certain federal, state and foreign taxes which reflected an effective tax rate of 26%. During 2021, we recorded $4.8 million of income tax expense related to certain federal, state and foreign taxes which reflected an effective tax rate of 10%. The lower tax rate in 2021 was primarily due to a $7.7 million tax benefit resulting from the exercise of 2.9 million SARs.
Liquidity and Capital Resources
As of December 30, 2022 and December 31, 2021, we had $30.3million and $45.8 million, respectively, of cash, and as of December 30, 2022 we had $59.7 million outstanding debt under our credit facility, net of deferred debt costs, and no balance outstanding in the prior year. We currently believe that available funds, including the cash on hand and funds available for borrowing under our credit facility, and cash flows generated by operations will be enough to fund our cash requirements, including working capital, debt payments, lease obligations and capital expenditures for at least the next twelve months and beyond. We may decide to raise additional funds in order to fund expansion, to develop new or further enhance products and services, to respond to competitive pressures, or to acquire complementary businesses or technologies. There is no assurance that additional financing would be available when needed or desired.
The following table summarizes our cash flow activity (in thousands):
Year Ended
December 30, December 31,
Cash flows provided by operating activities $ 58,904 $ 46,353
Cash flows used in investing activities $ (4,656 ) $ (3,242 )
Cash flows used in financing activities $ (69,736 ) $ (46,739 )
Cash Flows from Operating Activities
Net cash provided by operating activities was $58.9 million in 2022, as compared to $46.4 million in 2021. In 2022, the net cash provided by operating activities was primarily due to net income adjusted for non-cash items, a decrease in the income tax receivable and an increase in income tax liabilities, partially offset by the decrease in accrued liabilities and other accruals primarily due to payments to vendors and the 2021 incentive compensation payments. In 2021, the net cash provided by operating activities was primarily due to net income adjusted for non-cash items, and an increase in contract liabilities and incentive compensation, partially offset by increased accounts receivable and contract assets.
Cash Flows from Investing Activities
Net cash used in investing activities was $4.7 million in 2022, as compared to $3.2 million in 2021. During both periods, cash flows used in investing activities primarily related to investments for the development of our Hackett Connect Executive Advisory
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Member Platform, Market Intelligence Programs, IPaaS and continued development of our Quantum Leap benchmark and Digital Transformation technologies. The investing activities in 2022 also included purchases of computer equipment.
Cash Flows from Financing Activities
Net cash used in financing activities was $69.7 million in 2022, as compared to $46.7 million in 2021. The usage of cash in 2022 was primarily related to the repurchase of Company common stock under our share repurchase program of $116.6 million, inclusive of the transaction related costs, employee net vesting related tax withholding requirements of $3.2 million, and dividend payments of $10.4 million, partially offset by the $60.0 million drawdown of our credit facility. The usage of cash in 2021 was primarily related to the repurchase of Company common stock under our share repurchase program of $13.0 million, employee net vesting related tax withholding requirements of $21.6 million, including the exercise of 2.9 million SARs, and dividend payments of $12.9 million.
Material Cash Requirements
Debt Payments and Lease Obligations
On November 7, 2022, we amended and restated our credit agreement in order to extend the maturity date of our Credit Facility and provide the Company with an additional $55 million in borrowing capacity, for an aggregate amount of up to $100 million. See Note 8, “Credit Facility,” to our consolidated financial statements included in this Annual Report on Form 10-K for more information. As of December 30, 2022, we had $59.7 million of outstanding borrowings, net of deferred debt costs, under our revolving line of credit, leaving us with borrowing capacity of approximately $40.0 million. See Note 8 for more information.
There were no material capital commitments as of December 30, 2022. The following table summarizes our future principal payments under our future Credit Facility and lease commitments under our non-cancelable operating leases as of December 30, 2022 (in thousands):
Operating lease obligations $ 1,600 $ 1,037 $ 563 $ — $ —
Long-term debt obligations (1) — — — 60,000 —
(1) Excludes interest charges on borrowings, the fee on the amount of any unused commitment that we may be obligated to pay under our revolving credit facility as such amounts vary and the deferred debt costs. See Note 8, in the notes to consolidated financial statements for additional information.
Capital Expenditures
There were no material commitments for capital expenditures as of December 30, 2022. Our capital expenditures primarily consist of investments related to the continued development of our Quantum Leap benchmark technologies and laptop purchases. During the years ended December 30, 2022, and December 31, 2021, our capital expenditures were $4.7 million and $3.2 million, respectively. We expect capital expenditures for the year ended December 29, 2023, to approximate the capital expenditures in 2022.
Taxes
Cash paid for income taxes was $4.6 million and $9.1 million for the years ended December 30, 2022, and December 31, 2021, respectively.As a result of a tax deduction related to the exercise of 2.9 million SARs in 2021, we recorded an income tax receivable
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as of December 31, 2021, of $3.4 million, as compared to an income tax liability as of December 30, 2022 of $5.8 million. See Note 9, “Income Taxes” to our consolidated financial statements included in this Annual Report on Form 10-K for further information.
Dividends and Share Repurchases
During the fiscal year 2022, our Board of Directors approved four quarterly dividends payments of $0.11 per share totaling $13.4 million. Subsequent to our completion of the tender offer transaction, we expect dividend payments in 2023 to be approximately $12.0 million.
We have an ongoing authorization from our Board of Directors to repurchase shares of our common stock. During 2022, we repurchased 4.9 million shares of common stock at an average price per share of $23.69, for a total cost of $116.6 million, including the shares repurchased under the tender offer transaction and transaction fees. As of December 30, 2022, we had $14.7 million share repurchase authorization remaining. Subsequent to fiscal year end, we repurchased 37 thousand shares of the Company’s common stock from members of our Board of Directors for a total of $0.7 million, or $18.96 per share. Including these repurchases, we had approximately $14.0 million available for future repurchases under the plan as of March 3, 2023.
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 our employee’s behalf. In 2022, 0.2millionshares were withheld and not issued for a cost of $3.2 million, bringing the total cumulative cash used to repurchase stock in 2022 to $119.8 million, including the tender offer transaction and related transaction fees. In 2021, 1.1 million shares were withheld and not issued for a cost of $21.6 million, bringing the total cumulative cash used to repurchase stock in 2021 to $34.6 million, which included the net settlement of the 2.9 million SARs for a cost of $19.7 million.
Recently Issued Accounting Standards
For discussion of recently issued accounting standards, see Note 1 to our consolidated financial statements included in this Annual Report on Form 10-K.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 30, 2022, 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. The interest rates per annum applicable to loans under the credit facility will be, at our option, equal to either a base rate or a Bloomberg short-term bank yield index rate ("BSBY 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 2022 results of operations.
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, the Canadian Dollar and the Australian Dollar. We recognized income related to foreign currency exchange of $1.4 million, $130 thousand, and $49 thousand in 2022, 2021 and 2020, respectively. These exposures may change over time as business practices evolve. Currently, we do not hold any derivative contracts that hedge our foreign currency risk, but we may adopt such strategies in the future.
For a discussion of the risks we face as a result of foreign currency fluctuations, see “Item 1A. Risk Factors” in Part I of this report.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE HACKETT GROUP, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID:49) 30
Consolidated Balance Sheets as of December 30, 2022 and December 31, 2021 32
Notes to Consolidated Financial Statements 37
Schedule II – Valuation and Qualifying Accounts and Reserves 58
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of The Hackett Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Hackett Group, Inc. and its subsidiaries (the Company) as of December 30, 2022 and December 31, 2021, the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 30, 2022, and the related notes to the consolidated financial statements and schedule (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 30, 2022 and December 31, 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 30, 2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 30, 2022, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 3, 2023 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition for Fixed-Fee Billing Arrangements
As described in Note 1 to the consolidated financial statements, the Company generates substantially all of its revenue from providing professional services to its clients. In fixed-fee billing arrangements, 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 these arrangements using an input method approach, which is a subjective process 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.
We identified the measurement of progress for the purpose of revenue recognition under fixed-fee billing arrangements as a critical audit matter. Auditing management’s assumptions to estimate total engagement revenue and cost of services for the contract performance obligations used to recognize revenue for fixed-fee billing arrangements, involved a high degree of subjectivity and increased audit effort.
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Our audit procedures related to the Company’s revenue recognition for fixed-fee billing arrangements included the following, among others:
•
We obtained an understanding of the relevant controls related to fixed-fee billing arrangements and tested such controls for design and operating effectiveness, including controls over management’s estimation of the amount of revenue to recognize for customer contracts where revenue is recognized over time as work progresses.
•
We evaluated management’s ability to estimate progress towards completion by performing a historical review of completed contracts to determine the accuracy and precision of the Company’s estimation process. During this analysis we evaluated completed contracts in order to determine if previous estimates to complete were consistent with actual hours incurred to complete the contract.
•
We tested a sample of fixed-fee billing arrangements as follows:
o
Evaluated whether the contracts were properly included in management’s calculation of estimated contract revenue based on the terms and conditions of each contract, including whether continuous transfer of control to the customer occurred as progress was made toward completion of the performance obligations.
o
Compared the transaction prices to the consideration expected to be received based on current rights and obligations under the contracts and any modifications or change orders that were agreed upon with the customers.
o
Assessed the terms in the customer agreement and evaluated the appropriateness of management’s identification of performance obligations based on the underlying goods and services included in the contract.
o
Tested the completeness and accuracy of management’s calculation of progress toward completion to date for the performance obligations by comparing actual costs incurred to date to source documents and recalculating revenue recognized based on actual costs incurred to date as a percentage of total estimated costs.
o
Evaluated management’s estimates of costs to complete the performance obligations by comparing the inputs to source documents.
/s/ RSM US LLP
We have served as the Company's auditor since 2015.
Miami, Florida
March 3, 2023
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THE HACKETT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 30, December 31,
ASSETS
Current assets:
Prepaid expenses and other current assets 2,535 5,766
Operating lease right-of-use assets 698 1,649
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued expenses and other liabilities 30,953 30,297
Income tax payable 5,759 —
Operating lease liabilities 870 2,299
Long-term deferred tax liability, net 6,877 7,325
Long-term debt, net 59,653 —
Operating lease liabilities 584 1,474
Commitments and contingencies
Shareholders' equity:
Accumulated other comprehensive loss (14,881 ) (10,473 )
Total liabilities and shareholders' equity $ 184,993 $ 207,541
The accompanying notes are an integral part of the consolidated financial statements.
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THE HACKETT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended
December 30, December 31, January 1,
Revenue:
Costs and expenses:
Cost of service:
Restructuring and asset impairment (settlement) charge (651 ) — 10,488
Other expense, net:
Interest expense, net (144 ) (95 ) (126 )
Income from continuing operations before income taxes 55,104 46,381 8,516
Loss from discontinued operations (net of taxes) — (7 ) (172 )
Basic net income per common share:
Income per common share from continuing operations $ 1.30 $ 1.38 $ 0.19
Loss per common share from discontinued operations 0.00 0.00 (0.01 )
Basic net income per common share $ 1.30 $ 1.38 $ 0.18
Diluted net income per common share:
Income per common share from continuing operations $ 1.28 $ 1.26 $ 0.17
Loss per common share from discontinued operations 0.00 (0.00 ) (0.00 )
Diluted net income per common share $ 1.28 $ 1.26 $ 0.17
The accompanying notes are an integral part of the consolidated financial statements.
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THE HACKETT GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year Ended
December 30, December 31, January 1,
Foreign currency translation adjustment, net of income taxes (4,408 ) (905 ) 982
The accompanying notes are an integral part of the consolidated financial statements.
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THE HACKETT GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
Additional Accumulated
Common Stock Paid in Treasury Stock Retained Other Total
Earnings Comprehensive Shareholders'
Shares Amount Capital Shares Amount (Deficit) Loss Equity
Issuance of common stock, net 415 — (1,451 ) — — — — (1,451 )
Treasury stock purchased — — — (184 ) (2,367 ) — — (2,367 )
Amortization of restricted stock units
and common stock subject to
vesting requirements — — 9,783 — — — — 9,783
Dividends declared — — — — — (9,147 ) — (9,147 )
Foreign currency translation — — — — — — 982 982
Amortization of restricted stock units
and common stock subject to
vesting requirements — — 9,061 — — — — 9,061
Foreign currency translation — — — — — — (905 ) (905 )
Issuance of common stock, net 517 — (2,347 ) — — — — (2,347 )
Amortization of restricted stock units
and common stock subject to
Foreign currency translation — — — — — — (4,408 ) (4,408 )
The accompanying notes are an integral part of the consolidated financial statements.
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THE HACKETT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended
December 30, December 31, January 1,
Cash flows from operating activities:
Plus loss from discontinued operations, net of taxes — 7 172
Adjustments to reconcile net income from continuing operations to net
cash provided by operating activities from continuing operations:
Impairment of assets — — 3,885
Amortization of debt issuance costs 82 45 69
Provision for doubtful accounts 91 374 342
Gain on foreign currency transactions (1,353 ) (130 ) (49 )
Deferred income tax (benefit) expense (480 ) 1,469 (1,438 )
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses and other assets 4,414 (2,153 ) 261
(Decrease) increase in contract liabilities (1,338 ) 5,851 (818 )
Increase (decrease) in income taxes payable 5,759 (2,040 ) (463 )
Net cash used in operating activities from discontinued operations — (7 ) (172 )
Cash flows from investing activities:
Purchases of property and equipment (4,656 ) (3,242 ) (1,893 )
Net cash used in investing activities (4,656 ) (3,242 ) (1,893 )
Cash flows from financing activities:
Proceeds from long-term debt 60,000 — —
Debt issuance costs (381 ) (4 ) (21 )
Proceeds from issuance of common stock 876 755 751
Effect of exchange rate on cash (51 ) (33 ) 48
Supplemental disclosure of cash flow information:
Cash paid for interest $ 78 $ 57 $ 57
Supplemental disclosure of non-cash investing and financing activities:
Dividend declared during the year and paid the following year $ 2,997 $ - $ -
The accompanying notes are an integral part of the consolidated financial statements.
36
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and General Information
Nature of Business
The Hackett Group is an intellectual property-based strategic consultancy and leading enterprise benchmarking and best practices implementation firm to global companies. Services include business transformation, enterprise performance management, and global business services. The Hackett Group also provides dedicated expertise in business strategy, operations, finance, human capital management, strategic sourcing, procurement, and information technology, including its award-winning Oracle EPM and SAP practices.
Basis of Presentation and Consolidation
The accompanying consolidated financial statements include the Company’s accounts and those of its wholly owned subsidiaries which the Company is required to consolidate. The Company consolidates the assets, liabilities, and results of operations of its entities. Intercompany transactions and balances are eliminated upon consolidation.
Fiscal Year
The Company’s fiscal year generally consists of a 52-week period and periodically consists of a 53-week period as each fiscal year ends on the Friday closest to December 31. Fiscal years 2022, 2021, and 2020 ended on December 30, 2022, December 31, 2021, and January 1, 2021, respectively. References to a year included in the consolidated financial statements refer to a fiscal year rather than a calendar year.
Cash
The Company considers depository accounts and all short-term investments with maturities of three months or less to be cash equivalents to the extent that it places its temporary cash investments with high credit quality financial institutions. At times, such balances may be in excess of the F.D.I.C. insurance limits.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from its clients not making required payments. Management makes estimates of the collectability of accounts receivable and critically reviews accounts receivable and analyzes historical bad debts, past-due accounts, client credit worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of the Company’s clients were to deteriorate, resulting in their inability to make payments, additional allowances may be required.
Dividends
In December 2012, the Company’s Board of Directors approved the initiation of an annual cash dividend in the amount of $0.10 per share. The Company’s Board of Directors has been gradually increasing the dividend over the years. In 2020, 2021 and 2022, the Company’s Board of Directors approved an increase in the annual dividend to $0.38 per share, $0.40 per share, and to $0.44 per share, respectively. During 2022, the Company declared four quarterly dividend payments, the fourth of which was paid in January 2023. The dividend policy is reviewed periodically by the Board of Directors. The amount and timing of all dividend payments is subject to the discretion of the Board of Directors and will depend upon business conditions, contractual obligations, legal restrictions, results of operations, financial conditions and other factors.
Property and Equipment, Net
Property and equipment are recorded at cost. Depreciation is calculated to amortize the depreciable assets over their estimated useful lives using the straight-line method and commences when the asset is placed in service. The range of estimated useful lives is three to ten years. Leasehold improvements are amortized on a straight-line basis over the term of the lease or the estimated useful life of the improvement, whichever is shorter. Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for betterments and major improvements are capitalized. The carrying amount of assets sold or retired and related accumulated depreciation are removed from the balance sheet in the year of disposal and any resulting gains or losses are included in the consolidated statements of operations.
37
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and General Information (continued)
The Company capitalizes the costs of internal-use software, which generally includes hardware, software, and payroll-related costs for employees who are directly associated with, and who devote time, to the development of internal-use computer software.
Long-Lived Assets (excluding Goodwill and Indefinite Lived Intangible Assets)
Long-lived assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset’s carrying amount to determine if there has been an impairment. The amount of an impairment is calculated as the difference between the fair value of the asset and the carrying value. Estimates of future undiscounted cash flows are based on management’s view of growth rates for the related business, anticipated future economic conditions and estimates of residual values.
Business Combinations
For transactions that are considered business combinations, the purchased assets and assumed liabilities are recorded at fair value at acquisition date, and identifiable intangible assets are recorded at fair value. Costs directly related to the business combinations are recorded as expenses as they are incurred. Fair values are subject to refinement during the measurement period of up to one year after the closing date of an acquisition as information relative to closing date fair values become available.
Goodwill and Other Intangible Assets
Goodwill and intangible assets deemed to have indefinite lives are not amortized, but rather are tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate potential impairment. Finite-lived intangible assets are amortized over their useful lives. The excess cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill.
For acquisitions accounted for as a business combination, goodwill represents the excess of the cost over the fair value of the net assets acquired. Effective in the third quarter of fiscal year 2022, the Company reorganized its operating and internal reporting structure to better align with its primary market solutions. Due to the reorganization and 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 strategic business consulting practices; Oracle Solutions includes the results of the Company’s Oracle EPM/ERP and 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.With the new reporting unit structure, the goodwill previously assigned to Hackett Technology Solutions and The Hackett Group has now been allocated based on the reporting unit's relative fair value. The carrying amount and activity of goodwill by new reporting units are as follows (in thousands):
Foreign
December 31, Additions/ Currency December 30,
Goodwill is tested at least annually for impairment at the reporting unit level utilizing the market approach. In assessing the recoverability of goodwill and intangible assets, the Company utilizes the market approach and makes estimates based on assumptions regarding various factors to determine if impairment tests are met. The market approach utilizes valuation multiples based on operating data from publicly traded companies within the same industry. Multiples derived from guideline companies provide an indication of how much a market participant would be willing to pay for a company. These multiples are then applied to the Company’s reporting units to arrive at an indication of value. This approach contains management’s judgment, using appropriate and customary assumptions available at the time.
38
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and General Information (continued)
The Company performed its annual impairment test of goodwill in the fourth quarter of fiscal years 2022, 2021 and 2020 and determined that goodwill was not impaired.
Finite lived intangible assets are tested for potential impairment whenever events or changes in circumstances suggest that the carrying value of an asset may not be fully recoverable. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset’s carrying amount to determine if there has been an impairment. The amount of an impairment is calculated as the difference between the fair value of the asset and the carrying value. Estimates of future undiscounted cash flows are based on management’s view of growth rates for the related business, anticipated future economic conditions and estimates of residual values. Other intangible assets arise from business combinations and consist of customer relationships, customer backlog and trademarks that are amortized on a straight-line or accelerated basis over periods of up to five years.
Other intangible assets, included in other assets in the accompanying consolidated balance sheets, consist of the following (in thousands):
December 30, December 31,
Foreign currency translation adjustments — —
All of the Company’s intangible assets have been fully amortized in 2022. For the years ended December 30, 2022, December 31, 2021 and January 1, 2021 the Company recorded $0.2 million, $1.0 million and $1.0 million of finite-lived intangible assets amortization expense in each year, respectively.
Revenue Recognition
The Company generates substantially all of its revenue from providing professional services to its clients. The Company also generates revenue from software licenses, software support and 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 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 support, maintenance 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 licenses, are satisfied at a point in time.
The Company generates 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 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 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, however client terms are subject to change.
39
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and General Information (continued)
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 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-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-day terms, however client terms are subject to change.
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 maintenance which is 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 software licenses is recognized upon contract execution and customer’s receipt of the software. 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, 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 cost of service.
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 are recorded as contract assets. 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 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 12 months ended December 30, 2022, the Company recognized $13.1million of revenue as a result of changes in the contract liability balance, as compared to $8.3 million for the twelve months ended December 31, 2021.
40
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and General Information (continued)
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 years ended December 30, 2022, December 31, 2021 and January 1, 2021 (in thousands):
Year Ended
December 30, December 31, January 1,
Global S&BT:
Oracle Solutions:
SAP Solutions:
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 is generally less than 12 months. Commission expense is included in Selling, General and Administrative Costs in the accompanying consolidated statements of operations. As of December 30, 2022 and December 31, 2021, the Company had $1.5 million, and $1.6 million, respectively, of deferred commissions, of which $1.1 million and $1.0 million was amortized during the 12 months ended December 30, 2022 and December 31, 2021, respectively.
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.
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.
Stock Based Compensation
The Company recognizes compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards, with limited exceptions, over the requisite service period.
41
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and General Information (continued)
Restructuring Reserves
Restructuring reserves reflect judgments and estimates of the Company’s ultimate costs of severance, closure and consolidation of facilities and settlement of contractual obligations under its operating leases, including sublease rental rates, absorption period to sublease space and other related costs. The Company reassesses the reserve requirements to complete each individual plan under the restructuring programs at the end of each reporting period. If these estimates change in the future or actual results differ from the Company’s estimates, additional charges may be required.
Income Taxes
Deferred tax assets and liabilities are determined based on differences between the financial reporting carrying values and tax bases of assets and liabilities and are measured by using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to reverse. Deferred income taxes also reflect the impact of certain state operating loss and tax credit carryforwards. A valuation allowance is provided if the Company believes it is more likely than not that all or some portion of the deferred tax asset will not be realized. An increase or decrease in the valuation allowance, if any, that results from a change in circumstances, and which causes a change in the Company’s judgment about the realizability of the related deferred tax asset, is included in the tax provision.
The Company utilized a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. The Company reports penalties and tax-related interest expense as a component of income tax expense.
Discontinued Operations
The Company made the strategic decision to exit Company’s European REL Working Capital business at the end of fiscal year 2018. The sales of this business had been declining over several years prior to this decision as European countries experienced continued economic recoveries and improved cash balances. Companies were holding high cash reserves which drove working capital project sales of this group down across all of Europe.
As of December 30, 2022, and December 31, 2021, the Company did not have any carrying amounts of the major classes of assets and liabilities presented in discontinued operations in its consolidated balance sheets.
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 regards to common stock subject to vesting requirements and restricted stock units issued to employees, the calculation includes only the vested portion of such stock.
The potential issuance of common shares upon the exercise, conversion or vesting of unvested restricted stock units, common stock subject to vesting, stock options and stock appreciation right units ("SARs"), as calculated under the treasury stock method, may be dilutive. Diluted net income per share is computed by dividing the net income by the weighted average number of common shares outstanding and will increase by the assumed conversion of other potentially dilutive securities during the period.
42
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and General Information (continued)
The following table reconciles basic and diluted weighted average shares:
Year Ended
December 30, December 31, January 1,
Effect of dilutive securities:
Approximately 2 thousand sharesof common stock equivalents were excluded from the computations of diluted net income per common share for both of the years ended December 30, 2022 and December 31, 2021, as inclusion would have had an anti-dilutive effect on diluted net income per common share.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash, accounts receivable and contract assets, accounts payable and accrued expenses and other liabilities. As of December 30, 2022 and December 31, 2021, the carrying amount of each financial instrument, with the exception of debt, approximated the instrument’s 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 utilizing the market approach.
Concentration of Credit Risk
The Company provides services primarily to Global 2000 companies and other sophisticated buyers of business consulting and information technology services. The Company performs ongoing credit evaluations of its major customers and maintains reserves for potential credit losses. In 2022 one customer accounted for 7% of total revenue, all of which was included in the Global S&BT segment, and in 2021 and 2020 no customer accounted for more than 5% of total revenue.
Management’s Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Other Comprehensive Income
The Company reports its comprehensive income in accordance with FASB ASC Topic 220, Comprehensive Income, which establishes standards for reporting and presenting comprehensive income and its components in a full set of financial statements. Other comprehensive income consists of net income and currency translation adjustments.
Segment Reporting
Segments are defined as components of a company that engage in business activities from which they may earn revenues 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. Effective in the third quarter of 2022, the Company re-assessed its operating segments under the management approach in accordance with ASC 280, Segment Reporting (ASC 280) and has determined that effective in the third quarter of 2022, it has three operating segments: Global S&BT, Oracle Solutions and SAP Solutions which are also its reportable segments. See Note 15 “Segment Information and Geographic Data” for detailed segment information.
43
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and General Information (continued)
Recent Accounting Pronouncements
The Company did not identify any new accounting pronouncements.
Reclassifications
Certain prior period amounts in the consolidated financial statements, and notes thereto, have been reclassified to conform to current year presentation with no effect on net income or shareholder’s equity.
2. Fair Value Measurement
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 December 30, 2022 and December 31, 2021, 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.
3. Accounts Receivable and Contract Assets, Net
Accounts receivable and contract assets, net, consists of the following (in thousands):
December 30, December 30,
Allowance for doubtful accounts (856 ) (2,702 )
Accounts receivable as of December 30, 2022 and December 31, 2021, is net of uncollected advanced billings. Contract assets as of December 30, 2022 and December 31, 2021 includes recognized recoverable costs and accrued profits on contracts for which billings had not been presented to clients.
4. Property and Equipment, net
December 30, December 31,
Depreciation expense for the years ended December 30, 2022, December 31, 2021, and January 1, 2021 was$3.3 million, $3.4 million, and $3.5 million, respectively, and is included in selling, general and administrative costs in the accompanying consolidated statements of operations.
44
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following (in thousands):
December 30, December 31,
Accrued compensation and benefits $ 9,320 $ 7,730
Deferred employer's payroll taxes — 1,780
Dividend payable 2,997 —
Restructuring liability 106 740
Accrued sales, use, franchise and VAT tax 2,572 1,783
Non-cash stock compensation accrual 1,241 1,357
Total accrued expenses and other liabilities $ 30,953 $ 30,297
The dividend declared in November 2021 was paid in December 2021, as compared the dividend declared in November 2022, which was paid in January 2023.
6. Restructuring and Asset Impairment Charge and Settlements
During 2020, the Company recorded restructuring charges of $10.5 million, of which $5.7 million was primarily related to the reduction of staff in the U.S. and Europe due to the impact of the COVID-19 pandemic and $4.8 million of which primarily related to real estate leases. In consideration of the COVID-19 pandemic and the changing nature of the Company’s use of office space for its workforce, the Company evaluated its existing office space utilization and made the decision to completely or partially abandon certain leased office spaces. As a result, the Company recorded restructuring charges of $4.8 million, primarily relating to the impairment of certain lease right-of-use assets, property, equipment and leasehold improvements and other real estate related costs.See Note 7 for further discussion.
The Company recorded the settlement of the restructuring charge in 2022 of $0.3 million and $0.4 million related to the settlement of the impairment of lease right-of use assets.
The following table summarizes the costs incurred in connection with the 2020 restructuring and asset impairment charge (in thousands):
January 1,
Employee related costs $ 5,710
Lease right-of-use asset impairment charges 3,545
Property, equipment and lease improvement impairment charges 340
Other lease related restructuring costs 893
45
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Restructuring and Asset Impairment Charge and Settlements (continued)
The following table summarizes the Company’s restructuring activities recorded in accrued expenses and other liabilities (in thousands):
Employee Related Exit, Closure and Consolidation
Costs of Facilities Total
Restructuring charge — — —
Restructuring settlement (70 ) (238 ) (308 )
7. 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 and 4 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 or clauses: 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 our lease liability nor our right-of use-asset.
The weighted average remaining lease term is less than one year. The weighted average discount rate utilized is 4%. The discount rates applied to each lease, reflects the Company’s estimated incremental borrowing rate. This includes an assessment of the Company’s credit rating to determine the rate that the Company would have to pay to borrow, on a collateralized basis for a similar term, an amount equal to the Company’s lease payments in a similar economic environment. For the twelve months ended December 30, 2022, the Company paid $1.5 million from operating cash flows for operating leases.
The Company has operating lease agreements for its premises that expire on various dates through December 2024. Lease expense for the years ended December 30, 2022, December 31, 2021, and January 1, 2021 was $1.2 million, $1.0 million and $2.5 million, respectively. The components of lease expense during the fiscal years ended December 30, 2022, December 31, 2021, and January 1, 2021, all related to operating lease costs.
Future minimum lease commitments under non-cancelable operating leases as of December 30, 2022, are as follows (in thousands):
Rental
Payments
Total lease payments 1,600
Less imputed interest (51 )
As of December 30, 2022, the Company does not have any additional operating leases that have not yet commenced that create significant rights and obligations for the Company.
46
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Credit Facility
On April 3, 2020, the Company amended its Credit agreement with Bank of America, N.A. to extend the maturity date to November 30, 2022. The amendment also increased the interest payable on outstanding loans in respect toa revolving line of credit by an additional per annum rate of 0.50% and provided for a LIBOR floor of 75 basis points. The borrowing capacity remained at $45.0 million until maturity and no draws were made.
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 BSBY rate, plus an applicable margin percentage. The applicable margin percentage is based on the consolidated leverage ratio, as defined in the Credit Agreement, however as of December 30, 2022 the applicable margin percentage was based on the pricing level 2 until the first compliance certificate under the Credit Agreement is delivered. As of December 30, 2022, the applicable margin percentage was 1.75% per annum based on the consolidated leverage ratio, in the case of the BSBY rate advances, and 1.00% per annum, in the case of base rate advances. The interest rate of the commitment fee as of December 30, 2022 was 0.250%. Interest payments are made on a monthly basis.
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 December 30, 2022, the Company was in compliance with all covenants.
The Company incurred $0.4 million and $4 thousand of incremental debt issuance costs in 2022 and 2021, respectively, as a result of the Credit Agreement. As of December 30, 2022, the Company had $0.3 million of debt issuance costs remaining which will be amortized over the remaining life of the Credit Facility.
As of December 30, 2022, the Company had $60.0 million of outstanding debt, excluding $0.3 million of deferred debt costs, and as of December 31, 2021, the Company did not have any outstanding debt.
47
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Income Taxes
The Company files federal income tax returns, as well as multiple state, local and foreign jurisdiction tax returns. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution on any particular uncertain tax position, the Company believes that its reserves for income taxes reflect the most probable outcome. The Company adjusts these reserves, as well as the related interest, in the light of changing facts and circumstances. The resolution of a matter would be recognized as an adjustment to the provision for income taxes and the effective tax rate in the period of resolution. The Company is no longer subject to examinations of its federal income tax returns by the Internal Revenue Service for years through 2018 and all significant state, local and foreign matters have been concluded for years through 2017.
The components of income before income taxes from continuing operations are as follows (in thousands):
Year Ended
December 30, December 31, January 1,
Income from continuing operations before income taxes $ 55,104 $ 46,381 $ 8,516
As a result of the tax deduction related to the exercise of the 2.9 million SARs in 2021, the Company had recorded an income tax benefit of $7.7 million, which resulted in a receivable balance of $3.4 million in prepaid expenses and other current assets on the consolidated balance sheet as of December 31, 2021.
The components of income tax expense from continuing operations are as follows (in thousands):
Year Ended
December 30, December 31, January 1,
Current tax expense
Deferred tax expense (benefit)
Income tax expense from continuing operations $ 14,302 $ 4,829 $ 2,871
48
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Income Taxes (continued)
A reconciliation of the federal statutory tax rate with the effective tax rate from continuing operations is as follows:
Year Ended
December 30, December 31, January 1,
U.S. statutory income tax expense rate 21.0 % 21.0 % 21.0 %
State income taxes, net of federal income tax expense 4.8 1.6 6.8
Valuation reduction (0.3 ) 0.1 (0.6 )
Meals and entertainment — — 0.6
Foreign rate differential 0.1 0.3 0.9
Share based compensation (1.0 ) (13.2 ) 2.4
Foreign exchange loss (0.2 ) (0.1 ) 0.2
The components of the net deferred income tax asset (liability) are as follows (in thousands):
Year Ended
December 30, December 31,
Deferred income tax assets:
Allowance for doubtful accounts $ 224 $ 681
Net operating loss and tax credits carryforward 2,902 2,562
Accrued expenses and other liabilities 5,804 5,014
Deferred income tax liabilities:
Tax over book amortization on goodwill and intangibles (10,316 ) (9,548 )
Net deferred income tax liability $ (6,877 ) $ (7,325 )
As of December 30, 2022, the Company had $1.0 million of U.S. state net operating loss carryforwards. Additionally, as of December 30, 2022, the Company had $7.9 million of foreign net operating loss carryforwards primarily from operations in the United Kingdom, Germany, France and Australia. A portion of the foreign net operating losses may be carried forward indefinitely.
The liability method of accounting for deferred income taxes requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In determining the need for valuation allowances the Company considers evidence such as history of losses and general economic conditions. As of December 30, 2022 and December 31, 2021 the Company had a valuation allowance of $1.5 million and $1.6 million, respectively, to reduce deferred income tax assets, primarily related to foreign net operating loss carryforwards, to the amounts expected to be realized.
The undistributed earnings in foreign subsidiaries as of December 30, 2022, was approximately $11.4 million. The Company has historically reinvested its foreign earnings abroad indefinitely and continues to reinvest future earnings abroad.
Penalties and tax-related interest expense are reported as a component of income tax expense. For the years ended December 30, 2022, December 31, 2021, and January 1, 2021 the total amount of accrued income tax-related interest and penalties was $192 thousand, $179 thousand and $167 thousand, respectively.
The Company prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.
49
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Income Taxes (continued)
The following table sets forth the detail and activity of the ASC 740 liability during the years ended December 30, 2022 and December 31, 2021 (in thousands):
Year Ended
December 30, December 31,
Additions based on tax positions 13 12
As of December 30, 2022 and December 31, 2021 the ASC 740-10, “Accounting for Uncertainty in Income Taxes”, liability of $0.5 million and $0.4 million, respectively, was classified as a current liability and included in accrued expenses and other liabilities in the accompanying consolidated balance sheets.
The Company does not believe there will be any material changes in its unrecognized tax positions over the next twelve months. The reversal of ASC 740-10 tax liabilities as of December 30, 2022 and December 31, 2021 would have a favorable impact on the effective tax rate in future period.
10. Stock Based Compensation
Stock Plans
Total share-based compensation included in net income for the years ended December 30, 2022, December 31, 2021, and January 1, 2021 is as follows:
Year Ended
December 30, December 31, January 1,
Common stock subject to vesting requirements 15 406 1,064
The number of shares available for future issuance under the Company's stock plans as of December 30, 2022 were 2,853,757. The Company issues new shares as they are required to be delivered under the plan.
Stock Options and SARs
The Company has granted stock options to employees and directors of the Company at exercise prices equal to the fair value of the stock at the date of grant. The options generally vest ratably over four years, based on continued employment, with a maximum term of ten years. Stock option activity under the Company’s stock option plans for the years ended December 30, 2022, December 31, 2021 and January 1, 2021, are summarized as follows:
The intrinsic value of the options that were exercised in 2022 and 2021 was $0.6 million and $2.4 million, respectively.
50
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Stock Based Compensation (continued)
All of the outstanding SARs as of January 1, 2021 were exercised in December 2021. There are no outstanding SARs as of December 30, 2022. As a result of the tax deduction related to the exercise of the 2.9 million SARs in 2021, the Company had recorded an income tax benefit of $7.7 million, which resulted in a receivable balance of $3.4 million in prepaid expenses and other current assets on the consolidated balance sheet as of December 31, 2021.
The activity for the year ended December 31, 2021 was as follows:
Number of SARs Weighted Average Exercise Price
Outstanding as of December 31, 2021 — —
The intrinsic value of the SARs that were exercised in 2021 was $46.1 million.
The fair value of the SARs and stock options was estimated using the Black-Scholes option pricing valuation model. The determination of fair value is affected by the Company's stock price, expected stock price volatility, expected term of the award and the risk-free rate of interest.
Restricted Stock Units
Under the stock plans, participants may be granted restricted stock units, each of which represents a conditional right to receive a common share in the future. The restricted stock units granted under this plan generally vest over one of the following vesting schedules: (1) a four -year period, with 50% vesting on the second anniversary and 25% of the shares vesting on the third and fourth anniversaries of the grant date, (2) a four -year period, with 25% vesting on the first, second, third and fourth anniversary, (3) a three -year period with 33% vesting on the first, second and third anniversary, or (4) a one-year period with 100% vest on the first anniversary. Upon vesting, the restricted stock units will convert into an equivalent number of shares of common stock. The amount of expense relating to the restricted stock units is based on the closing market price of the Company’s common stock on the date of grant and is amortized on a straight-line basis over the applicable requisite service period. Restricted stock unit activity for the year ended December 30, 2022, was as follows:
Number of Restricted Stock Units Weighted Average Grant-Date Fair Value
The Company recorded restricted stock units-based compensation expense of $10.3million, $9.7 million and $8.7 million in 2022, 2021, and 2020 respectively, which is included in stock compensation expense, based on the vesting provisions of the restricted stock units and the fair value of the stock on the grant date. As of December 30, 2022, there was $11.7 million of total restricted stock unit compensation expense related to the unvested awards not yet recognized, which is expected to be recognized over a weighted average period of 2.3 years. The Company accounts for certain restricted stock units under liability accounting as a result of the fixed monetary amount and a variable number of shares that will be issued.
51
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Stock Based Compensation (continued)
Common Stock Subject to Vesting Requirements
Shares of common stock subject to vesting requirements were issued to employees of acquired companies. These shares vest over a period of up to four years. Compensation expense was based on the fair value of the Company’s common stock at the time of grant and is recognized on a straight-line basis. The activity for common stock subject to vesting requirements for the year ended December 30, 2022 was as follows:
Common stock subject to vesting requirements of $1.0 million was issued in 2019 in relation to acquisitions. These shares are subject to up to a four-year vesting period.
The Company recorded compensation expense of $15 thousand, $0.4 million and $1.1 million, during the years ended December 30, 2022, December 31, 2021, and January 1, 2021 respectively, related to common stock subject to vesting requirements.
As of December 30, 2022, there was $10 thousand of total stock-based compensation expense related to common stock granted subject to vesting requirements not yet recognized, which is expected to be recognized over a weighted average period of 0.8 years.
11. Shareholders’ Equity
Employee Stock Purchase Plan
Effective July 1, 1998, the Company adopted an Employee Stock Purchase Plan to provide substantially all employees who have completed three months of service as of the beginning of an offering period an opportunity to purchase shares of its common stock through payroll deductions. Purchases on any one grant are limited to 10% of eligible compensation. Shares of the Company’s common stock may be purchased by employees at six-month intervals at 95% of the fair value on the last trading day of each six-month period. The aggregate fair value, determined as of the first trading date of the offering period, of shares purchased by an employee may not exceed $25,000 annually. On February 17, 2022, the Company’s Board of Directors and the Company’s shareholders approved an extension of the Employee Stock Purchase Plan to July 1, 2028 and added an additional 250,000 shares of common stock which increased the total available shares of common stock to 282,069 at that time. As of the year end 2022, a total of 241,447 sharesof common stock were available for purchase under the plan. For plan years 2022, 2021 and 2020, 40,622 shares, 41,504 shares and 56,679 shares, respectively, were issued for total proceeds of $0.8 million in each year.
Treasury Stock and Tender Offer
On July 30, 2002, the Company announced that its Board of Directors approved the repurchase of up to 5.0 million 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, $120.0 million of which was approved in 2022. As of December 30, 2022, the Company had affected cumulative purchases under the plan of $272.5million, leaving $14.7millionavailable for future purchases.
In December 2022 the Company completed the tender offer through which 4.9 million shares were accepted for purchase for a total cost, inclusive of transaction related fees, of $115.9 million, or $23.71 per share, which represented 15% of the Company's issued and outstanding stock at the time. The Company used $60.0 million in borrowings from its Credit Facility and cash on hand to fund the tender offer as discussed in Note 8.
52
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Shareholders’ Equity (continued)
During 2022 and 2021, the Company repurchased 4.9 million and 749 thousand shares of its common stock, respectively, at an average price per share of $23.69 and $17.42, respectively, for a total cost of $116.7million and $13.0 million, respectively. As of December 30, 2022 and December 31, 2021 the Company had repurchased under the plan inception to date 33.2million and 28.3 million shares of its common stock, respectively, at an average price of $8.21 per share and $5.51 per share, respectively. In addition to the shares tendered under the tender offer, during 2022, the Company repurchased 31 thousand shares of its common stock from members of its Board of Directors for $0.6 million or $20.50 per share. The proceeds from the sale of these shares were used in part to cover estimated tax liabilities associated with previously vested restricted stock units.
There is no expiration of the authorization. Under the repurchase plan, the Company may buy back shares of its outstanding stock from time to time 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. In 2022, 0.2 million shares were withheld and not issued for a cost of $3.2 million bringing the total cumulative cash used to repurchase stock in 2022 to $119.8 million. In 2021, 1.1 million shares were withheld and not issued for a cost of $21.6 million bringing the total cumulative cash used to repurchase stock in 2021 to $34.6 million, which includes the net exercise of the SARs and options as discussed in Note 10. The shares withheld for taxes are included under issuance of common stock in the accompanying consolidated statements of shareholders’ equity.
Dividends
In December 2012, the Company announced an annual dividend of $0.10 per share to be paid semi-annually. In 2020, the Company increased the annual dividend to $0.38 per share to be paid on a quarterly basis which resulted in aggregate dividends of $9.1 million paid to shareholders of record on June 30, 2020, September 25, 2020, and December 18, 2020, all of which were paid in 2020. In 2021, the Company increased the annual dividend to $0.40 per share to be paid on a quarterly basis which resulted in aggregate dividends of $12.9 million paid to shareholders of record on March 26, 2021, June 25, 2021, September 24, 2021, and December 17, 2021, all of which were paid in 2021. In 2022, the Company increased the annual dividend to $0.44 per share to be paid on a quarterly basis which resulted in aggregate dividends of $13.4 million paid to shareholders of record on April 5, 2022,July 6, 2022, October 5, 2022,and December 17, 2022. The December 17, 2022 dividend was paid January 6, 2023. These dividends were paid from U.S. domestic sources and are accounted for as an increase to accumulated deficit. Subsequent to December 30, 2022, the Company declared its first quarterly dividend for 2023 of $0.12 per share for shareholders on March 24, 2023, to be paid on April 7, 2023.
12. 401(k) Plan
The Company maintains a 401(k) plan covering all eligible employees. Subject to certain dollar limits, eligible employees may contribute up to 15% of their pre-tax annual compensation to the plan. The Company may make discretionary contributions on an annual basis. The Company makes matching contributions of 40% of employee eligible contributions up to 6% of their gross salaries. The Company’s matching contributions were $0.9million for 2022 and $0.8 million in both 2021 and 2020.
13. Transactions with Related Parties
During the year ended December 30, 2022, the Company repurchased 31 thousand shares of the Company’s stock from members of its Board of Directors for a total cost of $0.6 million, or $20.50 per share. During the year ended December 31, 2021, the Company repurchased 24 thousand shares of the Company’s stock from members of its Board of Directors for a total cost of $0.4 million, or $16.05 per share. Subsequent to the year ended December 30, 2022, the Company repurchased 37 thousand shares of the Company’s stock from members of its Board of Directors for a total of $0.7 million, or $18.96 per share. The proceeds from the sale of these shares were used primarily to cover estimated tax liabilities associated with previously vested restricted stock units. See Note 11 for further details.
53
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. 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 consolidated financial position, cash flows or results of operations.
15. Segment Information and Geographical Data
Effective in the third quarter of fiscal year 2022, the Company has reorganized its operating and internal reporting structure to better align with its primary market solutions. As a result of the reorganization and in accordance with ASC 280, management has made the determination to present 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 AMS practices; SAP Solutions includes the Company’s SAP applications and related SAP service offerings.
Due to the change in reportable segments, the Company has presented the segment information for the twelve months ended December 30, 2022, December 31, 2021, and January 1, 2021, respectively. While our consolidated results were not impacted by this change, we recast the historical segment information below for comparability. The SAP Solutions reportable segment is the only segment that contains software license sales.
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 revenues generated by a segment, less operating expenses that are incurred directly by the segment. Unallocated costs include corporate costs related to administrative functions that are performed in a centralized manner that are not attributable to a particular segment. Segment information related to assets has been omitted as the CODM does not receive discrete financial information regarding assets at the segment level.
54
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Segment Information and Geographical Data (continued)
The tables below set forth information about the Company’s operating segments for the years ended December 30, 2022, December 31, 2021 and January 1, 2021 along with the items necessary to reconcile the segment information to the totals reported in the accompanying consolidated financial statements (in thousands):
Year Ended
December 30, December 31, January 1,
Global S&BT:
Oracle Solutions:
SAP Solutions:
Total Company:
Items not allocated to segment level:
Acquisition-related compensation expense - 11 50
Restructuring and asset impairment (settlement) charge (651 ) - 10,488
Income from continuing operations before taxes $ 55,104 $ 46,381 $ 8,516
*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. Corporate general and administrative expenses exclude one-time, non-recurring expenses and benefits.
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):
Year Ended
December 30, December 31, January 1,
Revenue:
55
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Segment Information and Geographical Data (continued)
Long-lived assets are attributed to geographic areas as follows (in thousands):
December 30, December 31,
Long-lived assets:
Other (Australia, Canada, India and Uruguay) 482 583
As of December 30, 2022 and December 31, 2021 foreign assets included $13.5 million and $15.1 million, respectively, of goodwill related to acquisitions.
56
THE HACKETT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Quarterly Financial Information (unaudited)
The following tables present unaudited supplemental quarterly financial information for the years ended December 30, 2022 and December 31, 2021 (in thousands, except per share data):
Quarter Ended
Basic net income per common share $ 0.33 $ 0.32 $ 0.33 $ 0.32