HCKT · Read the filing

ITEM 1A.RISK FACTORS

Our business is subject to risks. The following important factors could cause actual results to differ materially from those contained in forward-looking statements made in this Annual Report on Form 10-K or our other publicly filed documents.

Business, Market and Strategy Risks

Our results of operations could be negatively affected by global and regional economic conditions.

Global and regional economic conditions may affect our clients’ businesses and the markets they serve. A substantial or prolonged economic downturn, weak or uncertain economic conditions or similar factors could adversely affect our clients’ financial condition which may reduce our clients’ demand for our services, force price reductions, cause project cancellations, or delay consulting services for which they have engaged us. For example, COVID-19 pandemic has created uncertainty in the global economy and could result in a reduction in spending on our services and the geopolitical disruption resulting from the Russian and Ukraine conflict. In addition, if we are unable to successfully anticipate the changing economic conditions, we may be unable to effectively plan for and respond to those changes, and our business could be negatively affected.

Our results of operations have been adversely affected and could in the future be materially adversely impacted by the COVID-19 pandemic.

The global spread of the COVID-19 pandemic has created significant volatility, uncertainty and economic disruption. Our clients, and therefore our business and revenues, are sensitive to negative changes in general economic conditions and business confidence.

We continue to work with our clients and employees to responsibly address this global pandemic. We will continue to monitor the situation and assess possible implications to our business and our clients and employees and will take appropriate actions in an effort to mitigate adverse consequences. We cannot assure you that we will be successful in any such mitigation efforts. The extent to which the coronavirus pandemic impacts our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration, severity and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the impact of the pandemic on economic activity and actions taken in response; the effect on our clients and client demand for our services and solutions; the ability of our clients to pay for our services and solutions; and any closures of our clients’ offices and facilities. Clients may also slow down decision making, delay planned work or seek to terminate existing agreements. Any of these events could cause or contribute to the risks and uncertainties enumerated in “Item 1A. Risk Factors” and elsewhere in this Annual Report and could materially adversely affect our business, financial condition, results of operations and/or stock price.

Our quarterly operating results may vary.

Our financial results may fluctuate from quarter to quarter in any given year and should not be used to predict future performance. In future quarters, our operating results may not meet analysts’ and investors’ expectations. If that happens, the price of our common stock may fall. Many factors can cause fluctuations in our financial results, including:

• number, size, timing and scope of client engagements;

• customer concentration;

• long and unpredictable sales cycles;

• contract terms of client engagements;

• degrees of completion of client engagements;

• client engagement delays or cancellations;

• competition for and utilization of employees;

• the integration of acquired businesses;

• pricing changes in the industry;

• foreign currency changes;

• foreign laws and regulatory requirements;

• natural disasters, pandemics and other catastrophic events;

• global economic conditions.

A high percentage of our operating expenses, particularly personnel and rent, are fixed in advance of any particular quarter. As a result, if we experience unanticipated changes in client engagements or in consultant utilization rates, we could experience large variations in quarterly operating results and losses in any particular quarter. Due to these factors, we believe our quarter-to-quarter operating results should not be used to predict future performance.

If we are unable to maintain our reputation and expand our brand name recognition, we may have difficulty attracting new business and retaining current clients and employees.

We believe that establishing and maintaining a good reputation and name recognition are critical for attracting and retaining clients and employees in our industry. We also believe that the importance of reputation and name recognition will continue to increase due to the number of providers of business consulting and IT services. If our reputation is damaged or if potential clients are not familiar with us or with the solutions we provide, we may be unable to attract new, or retain existing, clients and employees. Promotion and enhancement of our name will depend largely on our success in continuing to provide effective solutions. If clients do not perceive our solutions to be effective or of high quality, our brand name and reputation will suffer. In addition, if solutions we provide have defects, critical business functions of our clients may fail, and we could suffer adverse publicity as well as economic liability.

We depend heavily on a limited number of clients.

We have derived, and believe that we will continue to derive, a significant portion of our revenue from a limited number of clients for which we perform large projects. In 2021, our ten largest clients accounted for 22% of our aggregate revenue. In addition, revenue from a large client may constitute a significant portion of our total revenue in any particular quarter. Our customer contracts generally can be cancelled for convenience by the customer upon 30 days’ notice. The loss of any of our large clients for any reason, including as a result of the acquisition of that client by another entity, our failure to meet that client’s expectations, the client’s decision to reduce spending on projects, or failure to collect amounts owed to us from our client could have a material adverse effect on our business, financial condition and results of operations.

Our markets are highly competitive.

We may not be able to compete effectively with current or future competitors. The business consulting and IT services markets are highly competitive. We expect competition to further intensify as these markets continue to evolve. Some of our competitors have longer operating histories, larger client bases, longer relationships with their clients, greater brand or name recognition and significantly greater financial, technical and marketing resources than we do. As a result, our competitors may be in a stronger position to respond more quickly to new or emerging technologies and changes in client requirements and to devote greater resources than we can to the development, promotion and sale of their services. Competitors could lower their prices, potentially forcing us to lower our prices and suffer reduced operating margins. We face competition from international accounting firms; international, national and regional strategic consulting and systems implementation firms; and the IT services divisions of application software firms.

In addition, there are relatively low barriers for entry into the business consulting and IT services market. We do not own any patented technology that would stop competitors from entering this market and providing services similar to ours. As a result, the emergence of new competitors may pose a threat to our business. Existing or future competitors may develop and offer services that are superior to, or have greater market acceptance, than ours, which could significantly decrease our revenue and the value of your investment.

We could lose money on our contracts.

As part of our strategy, from time to time, we enter into capped or fixed-price contracts, in addition to contracts based on payment for time and materials. Because of the complexity of many of our client engagements, accurately estimating the cost, scope and duration of a particular engagement can be a difficult task. We maintain an Office of Risk Management (“ORM”) that evaluates and attempts to mitigate delivery risk associated with complex projects. In connection with their review, ORM analyzes the critical estimates associated with these projects. If we fail to make these estimates accurately, we could be forced to devote additional resources to these engagements for which we will not receive additional compensation. To the extent that an expenditure of additional resources is required on an engagement, this could reduce the profitability of, or result in a loss on, the engagement. We may be unsuccessful in negotiating with clients regarding changes to the cost, scope or duration of specific engagements. To the extent we do not sufficiently communicate to our clients, or our clients fail to adequately appreciate the nature and extent of any of these types of changes to an engagement, our reputation may be harmed, and we may suffer losses on an engagement.

Lack of detailed written contracts could impair our ability to recognize revenue for services performed, collect fees, protect our IP and protect ourselves from liability to others.

We protect ourselves by entering into detailed written contracts with our clients covering the terms and contingencies of the client engagement. In some cases, however, consistent with what we believe to be industry practice, work is performed for clients on

the basis of a limited statement of work or verbal agreement before a detailed written contract can be finalized. To the extent that we fail to have detailed written contracts in place, our ability to collect fees, protect our IP and protect ourselves from liability to others may be impaired.

We may lose large clients or may not be able to secure targeted follow-on work or achieve expected client retention rates.

Our client engagements are generally short-term arrangements, and most clients can reduce or cancel their contracts for our services with a 30 days’ notice and without penalty. As a result, if we lose a major client or large client engagement, our revenue will be adversely affected. We perform varying amounts of work for specific clients from year to year. A major client in one year may not use our services in another year. In addition, we may derive revenue from a major client that constitutes a large portion of total revenue for particular quarters. If we lose any major clients or any of our clients cancel programs or significantly reduce the scope of a large engagement, our business, financial condition, and results of operations could be materially and adversely affected. Also, if we fail to collect a large accounts receivable balance, we could be subjected to significant financial exposure. Consequently, you should not predict or anticipate our future revenue based upon the number of clients we currently have or the number and size of our existing client engagements.

We also derive a portion of our revenue from annual memberships for our Executive Advisory Programs. Our growth prospects therefore depend on our ability to achieve and sustain renewal rates on programs and to successfully launch new programs. Failure to achieve expected renewal rate levels or to successfully launch new programs and services could have an adverse effect on our operating results.

The market price of our common stock may fluctuate widely.

The market price of our common stock could fluctuate substantially due to:

• future announcements concerning us or our competitors;

• quarterly fluctuations in operating results;

• announcements of acquisitions or technological innovations;

• changes in earnings estimates or recommendations by analysts; or

• current market volatility.

In addition, the stock prices of many business and technology services companies fluctuate widely for reasons which may be unrelated to operating results. Fluctuation in the market price of our common stock may impact our ability to finance our operations and retain personnel.

Operational Risks

We have risks associated with potential acquisitions or investments.

Since our inception, we have expanded through acquisitions. In the future, we plan to pursue additional acquisitions as opportunities arise. We may not be able to successfully integrate businesses which we may acquire in the future without substantial expense, delays or other operational or financial problems. We may not be able to identify, acquire or profitably manage additional businesses. Also, acquisitions may involve a number of risks, including:

• diversion of management’s attention;

• failure to retain key personnel;

• failure to retain existing clients;

• unanticipated events or circumstances;

• unknown claims or liabilities;

• amortization of certain acquired intangible assets; and

• operating in new or unfamiliar geographies.

Client dissatisfaction or performance problems at a single acquired business could have a material adverse impact on our reputation as a whole. Further, we cannot assure you that our future acquired businesses will generate anticipated revenue or earnings.

Difficulties in integrating businesses we acquire in the future may demand time and attention from our senior management.

Integrating businesses that we acquire in the future may involve unanticipated delays, costs and/or other operational and financial problems. In integrating acquired businesses, we may not achieve expected economies of scale or profitability or realize sufficient revenue to justify our investment. If we encounter unexpected problems as we try to integrate an acquired firm into our

business, our management may be required to expend time and attention to address the problems, which would divert their time and attention from other aspects of our business.

We may not be able to hire, train, motivate, retain and manage professional staff.

To succeed, we must hire, train, motivate, retain and manage highly skilled employees. Competition for skilled employees who can perform the services we offer is intense. We might not be able to hire enough skilled employees or train, motivate, retain and manage the employees we hire. This could hinder our ability to complete existing client engagements and bid for new ones. Hiring, training, motivating, retaining and managing employees with the skills we need is time-consuming and expensive.

We rely on information management systems and any damage, interruption or compromise of our information management systems or data could disrupt and harm our business.

We rely upon information technology systems and networks, some of which are managed by third parties, to process, transmit, and store electronic information in connection with the operation of our business. Additionally, we collect and store data that is sensitive to our company. Operating these information technology systems and networks and processing and maintaining this data, in a secure manner, are critical to our business operations and strategy. Our information management systems and the data contained therein may be vulnerable to damage, including interruption due to power loss, system and network failures, operator negligence and similar causes.

The techniques used to obtain unauthorized access, disable or degrade service or sabotage systems are constantly evolving and often are not recognized until launched against a target, or even some time after. We may be unable to anticipate these techniques, implement adequate preventative measures or remediate any intrusion on a timely or effective basis even if our security measures are appropriate, reasonable, and/or comply with applicable legal requirements. Certain efforts may be state-sponsored and supported by significant financial and technological resources, making them even more sophisticated and difficult to detect. Insider or employee cyber and security threats are also a significant concern for all companies, including ours. Given the unpredictability of the timing, nature and scope of such disruptions, we could potentially be subject to production downtimes, operational delays, other detrimental impacts on our operations or ability to provide products and services to our customers, the compromising, misappropriation, destruction or corruption of data, security breaches, other manipulation or improper use of our systems or networks, financial losses from remedial actions, loss of business or potential liability, and/or damage to our reputation, any of which could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition. Any significant compromise of our information management systems or data could impede or interrupt our business operations and may result in negative consequences including loss of revenue, fines, penalties, litigation, reputational damage, inability to accurately and/or timely complete required filings with government entities including the SEC and the Internal Revenue Service, unavailability or disclosure of confidential information (including personal information) and negative impact on our stock price.

Global Operational Risks

We earn revenue, incur costs and maintain cash balances in multiple currencies, and currency fluctuations could adversely affect our financial results.

We have international operations, where we earn revenue and incur costs in various foreign currencies, primarily the British Pound, and the Euro. Doing business in these foreign currencies exposes us to foreign currency risks in numerous areas, including revenue, purchases, payroll and investments. Certain foreign currency exposures are naturally offset within an international business unit, because revenue and costs are denominated in the same foreign currency, and certain cash balances are held in U.S. Dollar denominated accounts. However, due to the increasing size and importance of our international operations, fluctuations in foreign currency exchange rates could materially impact our results.

Our cash position includes amounts denominated in foreign currencies. We manage our worldwide cash requirements considering available funds from our subsidiaries and the cost effectiveness with which these funds can be accessed. The repatriation of cash balances from certain of our subsidiaries outside the U.S. could have adverse tax consequences and be limited by foreign currency exchange controls. However, those balances are generally available in the local jurisdiction without legal restrictions to fund ordinary business operations. Any fluctuations in foreign currency exchange rates could materially impact the availability and amount of these funds available for transfer.

Legal, Regulatory and Compliance Risks

Our corporate governance provisions may deter a financially attractive takeover attempt.

Provisions of our charter and by-laws may discourage, delay or prevent a merger or acquisition which shareholders may consider favorable, including transactions in which shareholders would receive a premium for their shares. These provisions include the following:

If we are unable to protect our IP rights or infringe on the IP rights of third parties, our business may be harmed.

We rely upon a combination of nondisclosure and other contractual arrangements and trade secrets, copyright and trademark laws to protect our proprietary rights and the proprietary rights of third parties from whom we license IP. Although we enter into confidentiality agreements with our employees and limit distribution of proprietary information, there can be no assurance that the steps we have taken in this regard will be adequate to deter misappropriation of our IP, or that we will be able to detect unauthorized use and take appropriate steps to enforce our IP rights.

Although we believe that our services do not infringe on the IP rights of others and that we have all rights necessary to utilize the IP employed in our business, we are subject to the risk of claims alleging infringement of third-party IP rights. Any claims could require us to spend significant sums in litigation, pay damages, develop non-infringing IP or acquire licenses to the IP that is the subject of asserted infringement.

Data privacy and information security may require significant resources and presents certain risks.

We collect, store, have access to and otherwise process certain confidential or sensitive data, including proprietary business information, personal data or other information that is subject to privacy and security laws, regulations and/or customer-imposed controls. We operate in an environment in which data privacy regulatory and legal framework is evolving quickly and varies by jurisdiction. We cannot predict the cost of compliance with future data privacy laws, regulations and standards, or future interpretations of current laws, regulations and standards, related to privacy and cybersecurity or the potential effects on our business.

As a company doing business in Europe, we are also subject to European data protection laws and regulations. The European Union General Data Protection Regulation (“GDPR”), imposes stringent requirements in how we collect and process personal data and provides for significantly greater penalties for noncompliance; and several other countries have passed laws that require personal data relating to their citizens to be maintained on local servers and impose additional data transfer restrictions. In addition, we are also subject to and affected by new state privacy and data security laws such as the recently implemented California Consumer Privacy Act (“CCPA”). The CCPA became effective January 1, 2020 and imposes additional data privacy requirements on many businesses operating in the state, including, potentially, with respect to employee data. In addition, in 2020 several states introduced varying comprehensive privacy laws modeled to some degree on the CCPA and/or the GDPR. Compliance with multiple country and state laws containing varying requirements could be complicated and costly. Government enforcement actions can be costly and interrupt the regular operation of our business, and violations of data privacy laws can result in fines, reputational damage and civil lawsuits, any of which may adversely affect our business, reputation and financial statements.

Replacement of the London Interbank Offered Rate (“LIBOR”) benchmark rate could increase our cost of borrowing and interest expense.

LIBOR is used as an interest rate benchmark for establishing the variable rates of interest under our revolving credit facility. LIBOR has been the subject of recent national, international and other regulatory guidance and proposals for reform. In 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit the rates to calculate LIBOR after 2021. On November 30, 2020, ICE Benchmark Administration, the current administrator of LIBOR, announced that it intends to cease publication of 1-week and 2-month LIBOR at the end of 2021 and, subject to compliance with applicable regulations, including as to representativeness, it does not intend to cease publication of the remaining LIBOR tenors until June 30, 2023. It is uncertain whether LIBOR will be available as a benchmark for pricing our floating rate indebtedness until, or after, June 30, 2023. The consequences of the phase-out of LIBOR cannot be entirely predicted, but could result in new interest rate benchmarks, which could result in an increase in our variable rates of interest and interest expense.

ITEM 1B.UNRESOLVED STAFF COMMENTS

None.

ITEM 2.PROPERTIES

Our principal executive office is currently located at 1001 Brickell Bay Drive, Floor 30, Miami, Florida 33131. As of December 31, 2021, we had operating leases that expire on various dates through June 2024. During the fourth quarter of 2020, as a result of and 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 leases as part of its transformation initiatives related to real estate. This evaluation resulted in the complete and partial abandonment of certain leased office spaces and an asset impairment charge for certain lease right-of-use assets and certain property, equipment and leasehold improvements for impairment.

We do not own real estate and do not intend to invest in real estate or real estate-related assets.

ITEM 3.LEGAL PROCEEDINGS

We are involved in legal proceedings, claims, and litigation arising in the ordinary course of business not specifically discussed herein. In the opinion of management, the final disposition of such matters will not have a material adverse effect on our consolidated financial position, cash flows or results of operations.

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded under the Nasdaq Stock Market symbol, "HCKT". The closing sale price for the common stock on March 1, 2022, was $19.91.

As of March 1, 2022, there were 241 holders of record of our common stock and 31,614,513 shares of common stock outstanding.

Securities Authorized for Issuance under Equity Compensation Plans

The information required by this section is set forth under Item 12 of this Annual Report on Form 10-K and is herein incorporated by reference.

Performance Graph

The following graph compares our cumulative total shareholder return since January 1, 2016, with the Russell 2000 and a peer group index composed of other companies with similar business models identified below. The graph assumes that the value of the investment in our common stock and each index (including reinvestment of dividends) was $100 on January 1, 2016.

The 2021 Peer Group includes Alithya Group Inc. (formerly known as Edgewater Technology, Inc.), Huron Consulting Group, Inc. and Information Services Group, Inc.

Company Dividend Policy

In December 2012, we announced an annual dividend of $0.10 per share. In 2019, 2020 and 2021, the Board of Directors approved an increase in the annual dividend to $0.36 per share, $0.38 per share, and $0.40 per share, respectively. During 2020, the Board of Directors approved the increase in the frequency of dividend payments from semi-annual to quarterly. During fiscal 2021, we paid the quarterly dividend to shareholders of record on March 26, 2021, June 25, 2021, September 24, 2021, and December 17, 2021, totaling $12.9 million. Our credit agreement contains restrictions on our ability to declare dividends and repurchase shares. Subsequent to fiscal year end, the Board of Directors increased the annual dividend to $0.44 per share and declared the first quarterly dividend of 2022. The declaration of dividends shall at all times be subject to the final determination of our Board of Directors that a dividend is prudent and lawful at that time in consideration of the needs of the business and other factors including the ability to pay dividends under our credit agreement.

Purchases of Equity Securities

We have an ongoing authorization from our Board of Directors to repurchase shares of our common stock. The repurchase plan was first announced on July 30, 2002. Repurchases under this program are discretionary and are made in the open market or through privately negotiated transactions, subject to market conditions and trading restrictions. There is no expiration date on the current authorization. The following table summarizes our share repurchases during the year ended December 31, 2021 under this authorization:

Total Number Maximum Dollar

of Shares Purchased Value of Shares That

Total Number Average as Part of Publicly May Yet Be Purchased

of Shares Price Paid Announced Under the

Period Purchased per Share Program Program

As of December 31, 2021, the Company’s Board of Directors had approved a cumulative authorization of $167.2 million with cumulative purchases under the plan of $155.9 million, leaving $11.2 million available for future purchases. During the year ended December 31, 2021, the Company repurchased 749 thousand shares of its common stock under the repurchase plan approved by the Company's Board of Directors for $13.0 million at an average share price of $17.41, which included 24 thousand shares of the Company’s common stock from members of our Board of Directors for a total of $0.4 million, or $16.05 per share. All shares repurchased from members of the Board of Directors were approved by the Audit Committee. During the year ended January 1, 2021, the Company repurchased 184 thousand shares of its common stock under the repurchase plan approved by the Company's Board of Directors for $2.4 million at an average share price of $12.84, which included 37 thousand shares of the Company’s common stock from members of our Board of Directors for a total of $0.7 million, or $17.43 per share. Subsequent to fiscal year end, we repurchased 31 thousand shares of the Company’s common stock from members of our Board of Directors for a total of $0.6 million, or $20.50 per share. Including these subsequent purchases, we have approximately $10.6 million available for future purchases under the plan.

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 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 settlement of the 2.9 million SARs for a cost of $19.7 million. In 2020, 139 thousand shares were withheld and not issued for a cost of $2.1 million, bringing the total cumulative cash used to repurchase stock in 2020 to $4.5 million.

ITEM 6. [RESERVED]

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 2019 items and year-to-year comparisons between fiscal years 2020 and 2019 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 January 1, 2021.

Hackett, originally incorporated on April 23, 1997, is a leading 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.

Hackett is a strategic advisory firm and a world leader in best practice research, benchmarking and business transformation services which empirically defines and enables world-class enterprise performance. Hackett empirically defines world-class performance in sales, general and administrative and certain supply chain activities with analysis gained through nearly 20,000 benchmark and performance studies over 28 years at over 7,000 of the world’s leading companies.

Hackett’s combined capabilities include executive advisory programs, 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.

In the following discussion, Strategy and Business Transformation Group includes the results of our North America IP as-a-service offerings, which include our Executive Advisory Programs and Benchmarking Services, and our Business Transformation Practices (S&BT). ERP, EPM and Analytics (EEA) Solutions includes the results of our North America Oracle EEA and SAP Solutions Practices. International includes results of our S&BT and EEA Practices, primarily in Europe.

COVID-19 Pandemic Impact on Our Business

The level of revenue we achieve is based on our ability to deliver market leading services and solutions and to deploy skilled teams of professionals quickly. Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business confidence. Despite the disruption beginning in March 2020, the COVID-19 pandemic did not have a significant impact on our consolidated results of operations during the first quarter of 2020. However, our net revenue and diluted earnings per share were negatively impacted for the remainder of 2020, due to adverse economic conditions as a result of the COVID-19 pandemic. In each of the four quarters of 2021, our net revenue and diluted earnings per share grew when compared to the fourth quarter of 2020 reflecting a continuation of improved economic conditions. However, any reversal of these trends or a prolonged economic downturn as a result of the impact of COVID-19 variants, or otherwise, weak or uncertain economic conditions or similar factors could adversely affect our clients' financial condition which may further reduce our clients' demand for our services.

We continue to actively manage our business to respond to the impact of the COVID-19 pandemic. At the onset of the pandemic, we reduced employee headcount and restricted employee travel to only essential business needs. While headcount has increased and some select non-essential travel is being allowed, most of our employees continue to work remotely from home. We are generally following the requirements, recommendation and protocols published by the U.S. Centers for Disease Control and the World Health Organization, and state and local governments.

As a response to the COVID-19 pandemic, we implemented plans to manage our costs and preserve cash at the onset of the COVID-19 pandemic. We significantly limited the addition of new employees and third party contracted services, eliminated all travel except where necessary to meet customer needs, and limited discretionary spending. At the end of June 2020, we reduced our global workforce by approximately 10% and recorded a $5.0 million restructuring charge. During the fourth quarter of 2020, as a result of and in consideration of the COVID-19 pandemic, and the changing nature of our use of office space for its workforce, we evaluated our existing office leases as part of our transformation initiatives related to real estate. This evaluation resulted in the complete and partial abandonment of certain leased office spaces and an asset impairment charge of $3.9 million for certain lease right-of-use assets and certain property, equipment and leasehold improvements. All client concessions and accounts receivable allowances have been appropriately reflected in our financial statements. To the extent that economic conditions do not continue to improve and our business is again disrupted the reinstatement of cost management actions will be considered. Future asset impairment charges, increases in allowance for doubtful accounts, or restructuring charges will be dependent on the severity and duration of the COVID-19 pandemic.

In light of the evolving health, social, economic and business environment, governmental regulations or mandates, and business disruptions that could occur, the potential impact that the COVID-19 pandemic could have on our financial condition and operating results in the future remains uncertain.

For more information, see “Our results of operations have been adversely affected and could in the future be materially adversely impacted by the coronavirus pandemic (COVID-19),” under Item 1A, “Risk Factors.”

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.

Goodwill and Other Intangible Assets

Goodwill is tested at least annually for impairment. In assessing the recoverability of goodwill management makes estimates regarding market assumptions based on assumptions regarding various factors to determine if impairment tests are met. These estimates contain management’s judgment, using appropriate and customary assumptions available at the time. We performed our annual step one impairment test of our goodwill in the fourth quarter of fiscal 2021 and determined that goodwill was not impaired.

Other 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, management estimates future undiscounted cash flows associated with the asset and compares this to the asset’s carrying amount to determine if there has been an impairment. 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.

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 2021 and 2020 ended on December 31, 2021 and January 1, 2021, respectively. References to a year included in this document refer to a fiscal year rather than a calendar year.

The following table sets forth, for the periods indicated, our results of operations and the percentage relationship to revenue before reimbursements of such results (in thousands, except per share amounts).

Twelve Months Ended

December 31, January 1,

Revenue:

Costs and expenses:

Cost of service:

Non-cash stock compensation expense 6,360 6,255

Acquisition-related compensation expense (benefit) 11 50

Acquisition-related non-cash stock compensation expense 406 1,064

Non-cash stock compensation expense 3,356 2,421

Amortization of intangible assets 1,016 977

Total selling, general, and administrative expenses 59,187 21% 53,984 23%

Restructuring charges and asset impairments - 10,488

Other expense:

Interest expense (95 ) (126 )

Income from continuing operations before income taxes 46,381 17% 8,516 4%

Income from continuing operations (net of taxes) 41,552 5,645

Loss from discontinued operations (7 ) (172 )

Diluted net income per common share $ 1.26 $ 0.17

Comparison of 2021 to 2020

Overview. For fiscal year 2021, revenue before reimbursements increased 18% to $277.6 million, as compared to fiscal year 2020. 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 for the exercise of 2.9 million SARs which was recorded in the fourth quarter of 2021. Together, these items positively impacted dilutive earnings per share by $0.33.

Fiscal 2020 results included restructuring charges for the reduction of staff in the U.S. and Europe and the impairment of our operating lease right-of-use assets and certain property, equipment and leasehold improvements relating to the reduction in office space as we have transitioned towards a remote work environment. Together, these items negatively impacted dilutive earnings per share by $0.24.

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 2021 and 2020. Revenue is analyzed based on geographic location of engagement team personnel.

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

Year Ended

December 31, January 1,

Revenue from continuing operations before reimbursement $ 277,583 $ 234,810

Our total Company revenue from continuing operations and before reimbursements increased 18%, to $277.6 million in 2021, as compared to $234.8 million in 2020. The 2021 revenue growth includes a $5.3 million software sale transaction which was recorded in the second quarter of 2021. Net revenue in 2020 were affected from the economic disruption of the COVID-19 pandemic. In addition, in each of the four quarters of 2021, our net revenue and diluted earnings per share grew when compared to the fourth quarter of 2020 reflecting a continuation of improved economic conditions.

In 2021 and 2020, no customer accounted for more than 5% of our total revenue.

S&BT net revenue from continuing operations increased 22% in 2021, to $108.2 million, as compared to $88.7 million in 2020 due to increased rates and increased utilization driven by the improved demand for enterprise digital transformation initiatives experienced since the end of third quarter of 2020.

EEA net revenue from continuing operations increased 19% in 2021, to $145.6 million, as compared to $122.6 million in 2020, primarily driven by strong growth across all practices driven by increased demand. In addition, net revenue in 2021 included a $5.3 million software sale transaction which was recorded in the second quarter of 2021. EEA excluding the software sale transaction was $140.4 million.

Hackett international net revenue from continuing operations increased1% in 2021, as compared to 2020. Europe continues to be impacted by lengthened client decision-making from economic uncertainty, which has been further impacted by the COVID-19 pandemic. Total Company international net revenue from continuing operations accounted for 9% of our total revenue in 2021, as compared to 10% in 2020.

Reimbursable expenses are project and travel-related expenses passed through to a client with no margin associated with them. Reimbursable expenses as a percentage of net revenue were 0% in 2021, as compared to 2% in 2020. The low percentage of reimbursements to net revenue in 2021 and 2020 is running lower than historical rates and is directly attributable to the decreases in travel requirements resulting from the COVID-19 pandemic and the transition to a more remote service-based delivery model during 2021 and 2020. Reimbursements are project travel-related expenses passed through to a client with no associated impact to gross margins or profitability.

Cost of Service. Cost of service primarily consists of salaries, benefits and incentive compensation for consultants and subcontractor fees; acquisition-related cash and stock compensation costs; non-cash stock compensation expense; and reimbursable expenses associated with projects.

Personnel costs from continuing operations increased 7%, to $165.1 million in 2021, from $154.3 million in 2020. The higher costs were primarily a result of increased hiring and utilization of subcontractors to support revenue growth in 2021, as well as increases in incentive compensation accruals commensurate with Company performance. Personnel costs before reimbursable expenses and as a percentage of revenue before reimbursements was 59% in 2021, as compared to 66% in 2020.

Non-cash stock compensation expense from continuing operations was $6.4 million in 2021 and $6.3 million in 2020. See Note 10, “Stock Based Compensation” to our consolidated financial statements included in this Annual Report on Form 10-K for further information.

Acquisition related non-cash stock compensation expense in 2021 and 2020 related to equity awards issued in relation to acquisitions.

Selling, General and Administrative(“SG&A”). SG&A costs from continuing operations, excluding non-cash compensation expense, acquisition related costs and the amortization of intangible assets increased 8% to $54.8 million in 2021, from $50.6 million in 2020. This increase was primarily due to higher sales commissions and incentive compensation accruals associated with increased Company performance. SG&A costs as a percentage of revenue before reimbursements were 20% in 2021 and 22% in 2020.

Non-cash compensation expense included in total SG&A increased to $3.4 million in 2021, as compared to $2.4 million in 2020 due to increased Company performance. See Note 10, “Stock Based Compensation” to our consolidated financial statements included in this Annual Report on Form 10-K for further information.

Amortization expense was $1.0 million in both 2021 and 2020. The amortization expense in both periods related to the amortization of the intangible assets acquired in our acquisitions and joint venture in 2017. The intangible assets related to the acquisitions will continue to amortize until 2022 and the intangible asset related to the joint venture completed amortizing in 2021.

Restructuring Charges and Asset Impairments. During 2020,we recorded restructuring costs of $6.6 million, which were primarily related to the reduction of staff in the U.S. and Europe as a result of the impact of the COVID-19 pandemic. In addition, during the fourth quarter of 2020, as a result of and in consideration of the COVID-19 pandemic, and the changing nature of our use of office space for our workforce, we evaluated our existing office space utilization as part of our transformation initiatives related to real estate. This evaluation resulted in the complete and partial abandonment of certain leased office spaces and a $3.9 million restructuring charge related to the asset impairment for certain lease right-of-use assets and certain property, equipment and leasehold improvements and other real estate related costs.

Interest Expense. In 2021 and 2020, we recorded interest expense of $95 thousand and $126 thousand, respectively. There was no outstanding debt in 2021 or 2020.

Income Taxes. During 2021, we recorded $4.8 million of income tax expense related to certain federal, foreign and state taxes which reflected an effective tax rate of 10.4% from continuing operations. During 2020, we recorded $2.9 million of income tax expense related to certain federal, foreign and state taxes which reflected an effective tax rate of 33.7% from continuing operations. The decrease in the tax rate for 2021 was primarily due to a tax benefit resulting from the exercise of 2.9 million SARs. The tax rate in 2020 included restructuring charges impacting countries with lower statutory income tax rates and changes in our overall profitability due to the impact of the COVID-19 pandemic.

Discontinued Operations. The discontinued operations related to the discontinuance of our European REL Working Capital group in 2018.

Liquidity and Capital Resources

As of December 31, 2021 and January 1, 2021, we had $45.8 million and $49.5 million, respectively, of cash and no outstanding debt under our credit facility. 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 expenditure for at least the next twelve months and beyond. We may decide to raise additional funds to support expansion, to develop new or enhance products and services, to respond to competitive pressures to return capital to shareholders or to acquire complementary businesses or technologies. There is no assurance, however, that additional financing will be available when needed or desired.

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

Year Ended

December 31, January 1,

Cash flows provided by operating activities $ 46,353 $ 44,061

Cash flows used in investing activities $ (3,242 ) $ (1,893 )

Cash flows used in financing activities $ (46,739 ) $ (18,715 )

Cash Flows from Operating Activities

Net cash provided by operating activities was $46.4 million in 2021, as compared to $44.1 million in 2020. 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. In 2020, the net cash provided by operating activities was primarily due to net income adjusted for non-cash items, and decreased account receivables and contract assets, partially offset by lower accrued expenses and other liabilities.

Cash Flows from Investing Activities

Net cash used in investing activities was $3.2 million in 2021, as compared to $1.9 million in 2020. During 2021 and 2020, cash flows from investing activities included investments related to the continued development of our Quantum Leap benchmark technologies.

Cash Flows from Financing Activities

Net cash used in financing activities was $46.7 million in 2021, as compared to $18.7 million in 2020. 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. The usage of cash in 2020 was primarily related to dividend payments of $14.9 million, the repurchase of Company common stock under our share repurchase program of $2.4 million and employee net vesting related tax withholding requirements of $2.1 million.

Material Cash Requirements

Debt Payments and Lease Obligations

As of December 31, 2021, we did not have any outstanding borrowings under our revolving line of credit, leaving us with borrowing capacity of approximately $45.0 million. See Note 8, “Credit Facility,” to our consolidated financial statements included in this Annual Report on Form 10-K for more information.

There were no material capital commitments as of December 31, 2021. The following table summarizes our future principal payments under our future lease commitments under our non-cancelable operating leases as of December 31, 2021 (in thousands):

Contractual Obligations Total Less Than 1 Year More Than 1 Year

Capital Expenditures

There were no material commitments for capital expenditures as of December 31, 2021. 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 31, 2021, and January 1, 2021, our capital expenditures were $3.2 million and $1.9 million, respectively. We expect capital expenditures for the year ended December 30, 2022, to approximate the capital expenditures in 2021.

Taxes

Cash paid for income taxes was $9.1 million and $4.7 million for the years ended December 31, 2021, and January 1, 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 as of December 31, 2021, of $3.4 million, as compared to an income tax liability as of January 1, 2021 of $2.3 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 2021, our Board of Directors approved four quarterly dividends payments of $0.10 per share totaling $12.9 million. Subsequent to year end, the Board of Directors approved a 10% increase in the quarterly dividend payments from $0.10 per share to $0.11 per share. We expect dividend payments in 2022 to be approximately $14.0 million.

We have an ongoing authorization from our Board of Directors to repurchase shares of our common stock. During 2021, we repurchased 749 thousand shares of common stock at an average price per share of $17.41, for a total cost of $13.0 million. As of December 31, 2021, we had $11.2 million share repurchase authorization remaining. Subsequent to fiscal year end, we repurchased 31 thousand shares of the Company’s common stock from members of our Board of Directors for a total of $0.6 million, or $20.50 per share. Including these repurchases, we had approximately $10.6 million available for future repurchases under the plan as of March 4, 2022.

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 31, 2021, 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 LIBOR rate for one-, two-, three- or nine-month interest periods chosen by us in each case, plus an applicable margin percentage. A 100-basis point increase in our interest rate under our credit facility would not have had a material impact on our 2021 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 $0.1 million, $49 thousand, and $0.1 million in 2021, 2020 and 2019, 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.

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) 29

Consolidated Balance Sheets as of December 31, 2021 and January 1, 2021 31

Notes to Consolidated Financial Statements 36

Schedule II – Valuation and Qualifying Accounts and Reserves 54

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 31, 2021, and January 1, 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 31, 2021, 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 31, 2021 and January 1, 2021, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2021, 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 31, 2021, 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 4, 2022 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 financial statements that was communicated or required to be communicated to the audit committee and that: (i) relates to accounts or disclosures that are material to the financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the 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 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.

Our audit procedures related to the Company’s revenue recognition for fixed-fee billing arrangements included the following, among others:

• We tested a sample of fixed-fee billing arrangements as follows:

/s/ RSM US LLP

We have served as the Company's auditor since 2015.

Miami, Florida

March 4, 2022

THE HACKETT GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

December 31, January 1,

ASSETS

Current assets:

Prepaid expenses and other current assets 5,766 2,599

Operating lease right-of-use assets 1,649 2,578

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Accrued expenses and other liabilities 30,297 25,084

Commitments and contingencies

Shareholders' equity:

Retained earnings (accumulated deficit) 11,272 (17,388 )

Accumulated other comprehensive loss (10,473 ) (9,568 )

Total liabilities and shareholders' equity $ 207,541 $ 192,545

The accompanying notes are an integral part of the consolidated financial statements.

THE HACKETT GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

Year Ended

December 31, January 1, December 27,

Revenue:

Costs and expenses:

Cost of service:

Restructuring charges and asset impairments — 10,488 4,514

Acquisition-related contingent consideration liability — — (1,133 )

Other expense:

Income from continuing operations before income taxes 46,381 8,516 31,027

Loss from discontinued operations (net of taxes) (7 ) (172 ) (6 )

Basic net income per common share:

Income per common share from continuing operations $ 1.38 $ 0.19 $ 0.78

Loss per common share from discontinued operations (0.00 ) $ (0.01 ) $ (0.00 )

Basic net income per common share $ 1.38 $ 0.18 $ 0.78

Diluted net income per common share:

Income per common share from continuing operations $ 1.26 $ 0.17 $ 0.72

Loss per common share from discontinued operations (0.00 ) $ (0.00 ) $ (0.00 )

Diluted net income per common share $ 1.26 $ 0.17 $ 0.72

The accompanying notes are an integral part of the consolidated financial statements.

THE HACKETT GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

Year Ended

December 31, January 1, December 27,

Foreign currency translation adjustment, net of income taxes (905 ) 982 844

The accompanying notes are an integral part of the consolidated financial statements.

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 573 1 (1,717 ) — — — — (1,716 )

Treasury stock purchased — — — (339 ) (5,283 ) — — (5,283 )

Amortization of restricted stock units

and common stock subject to

vesting requirements — — 8,469 — — — — 8,469

Foreign currency translation — — — — — — 844 844

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 )

The accompanying notes are an integral part of the consolidated financial statements.

THE HACKETT GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Year Ended

December 31, January 1, December 27,

Cash flows from operating activities:

Plus loss from discontinued operations, net of taxes (7 ) (172 ) (6 )

Adjustments to reconcile net income from continuing operations to net

cash provided by operating activities from continuing operations:

Amortization of debt issuance costs 45 69 91

Gain on foreign currency transactions (130 ) (49 ) (90 )

Deferred income tax (benefit) expense 1,469 (1,438 ) 999

Changes in assets and liabilities, net of acquisition:

(Increase) decrease in prepaid expenses and other assets (2,153 ) 261 1,450

Cash flows from investing activities:

Purchases of property and equipment (3,242 ) (1,893 ) (4,568 )

Cash consideration paid for acquisitions — — (1,010 )

Net cash used in investing activities (3,242 ) (1,893 ) (5,578 )

Cash flows from financing activities:

Proceeds from borrowings — — 1,000

Payment of debt borrowings — — (7,500 )

Debt issuance costs (4 ) (21 ) —

Proceeds from issuance of common stock 755 751 806

Effect of exchange rate on cash (33 ) 48 60

Supplemental disclosure of cash flow information:

Cash paid for interest $ 57 $ 57 $ 231

Supplemental disclosure of non-cash investing and financing activities:

Dividend declared during the year and paid the following year $ - $ - $ 5,791

The accompanying notes are an integral part of the consolidated financial statements.

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 2021, 2020, and 2019 ended on December 31, 2021, January 1, 2021, and December 27, 2019, 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 2019, 2020 and 2021, the Company’s Board of Directors approved an increase in the annual dividend to $0.36 per share, $0.38 per share, and to $0.40 per share, respectively. During 2021, the Company funded four quarterly dividend payments. Subsequent to 2021, the Company’s Board of Directors approved the increase in the annual dividend from $0.40 to $0.44 per share to be paid on a quarterly basis and declared the first quarterly dividend of 2022. 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.

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.

Goodwill is tested at least annually for impairment at the reporting unit level utilizing the market approach. The reporting units consist of The Hackett Group (including global Benchmarking, Business Transformation, Strategy and Operations, Executive Advisory Programs and Robotics Process Automation) and Hackett Technology Solutions (including SAP ERP and SAP AMS, Oracle EPM and EPM AMS). 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.

The Company performed its annual step one impairment test of goodwill in the fourth quarter of fiscal years 2021 and 2020 and determined that goodwill was not impaired. The carrying amount and activity of goodwill attributable to The Hackett Group and Hackett Technology Solutions was as follows (in thousands):

Hackett

The Hackett Technology

Group Solutions Total

Foreign currency translation adjustment 719 — 719

Foreign currency translation adjustment (227 ) — (227 )

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.

THE HACKETT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation and General Information (continued)

Other intangible assets, included in other assets in the accompanying consolidated balance sheets, consist of the following (in thousands):

December 31, January 1,

Foreign currency translation adjustment — (7 )

All of the Company’s intangible assets are expected to be fully amortized in 2022. For the years ended December 31, 2021, January 1, 2021 and December 27, 2019, the Company recorded $1.0 million of amortization expense in each year. The estimated future amortization expense of intangible assets as of December 31, 2021 is $0.2 million in 2022.

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.

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 HACKETT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation and General Information (continued)

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 31, 2021, the Company recognized $8.3 million of revenue as a result of changes in the contract liability balance, as compared to $9.2 million for the twelve months ended January 1, 2021.

The following table reflects the Company’s disaggregation of revenue before reimbursements from continuing operations for the twelve months ended December 31, 2021, and January 1, 2021:

Year Ended

December 31, January 1, December 27,

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 31, 2021, and January 1, 2021, the Company had $1.6 million, and $1.5 million, respectively, of deferred commissions, of which $1.0 million and $1.5 million was amortized during the 12 months ended December 31, 2021 and January 1, 2021, respectively.

THE HACKETT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation and General Information (continued)

Practical Expedients

The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be less than one year.

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.

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.

THE HACKETT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation and General Information (continued)

As of December 31, 2021, and January 1, 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 sheet.

The following table presents the gain and loss results for the Company’s discontinued operations (in thousands):

Year Ended

December 31, January 1, December 27,

Revenue:

Revenue before reimbursements $ - $ - $ 75

Reimbursements — — 17

Total revenue — — 92

Costs and expenses:

Cost of service:

Personnel costs before reimbursable expenses 7 8 28

Reimbursable expenses — — 17

Total cost of service 7 8 45

Selling, general and administrative costs — 165 52

Total costs and operating expenses 7 173 97

Loss from discontinued operations before income taxes (7 ) (173 ) (5 )

Income tax (benefit) expense — (1 ) 1

Loss from discontinued operations $ (7 ) $ (172 ) $ (6 )

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.

The following table reconciles basic and diluted weighted average shares:

Year Ended

December 31, January 1, December 27,

Effect of dilutive securities:

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 31, 2021 and January 1, 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 its carrying amount using Level 2 inputs, due to the short-term variable interest rates based on market rates utilizing the market approach.

THE HACKETT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation and General Information (continued)

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 2021, 2020, and 2019 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

The Company engages in business activities in one operating segment, which provides business and technology consulting services.

Recent Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12 providing guidance to reduce complexity in certain areas of accounting for income taxes. The new guidance is effective fiscal years beginning after December 15, 2020. The adoption did not have a material impact on the Company’s consolidated financial statements.

Reclassifications

Certain prior period amounts in the consolidated financial statements, and notes thereto, have been reclassified to conform to current year presentation with no effect on net income or shareholder’s equity.

2. Fair Value Measurement

The Company records its assets and liabilities in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes the following three levels of inputs that may be used to measure fair value:

Level 1: Quoted market prices in active markets for identical assets or liabilities

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data

Level 3: Unobservable inputs that are not corroborated by market data

THE HACKETT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Accounts Receivable and Contract Assets, Net

Accounts receivable and contract assets, net, consists of the following (in thousands):

December 31, January 1,

Contract assets (unbilled revenue) 22,586 9,485

Allowance for doubtful accounts (2,702 ) (605 )

Accounts receivable as of December 31, 2021, and January 1, 2021, is net of uncollected advanced billings. Contract assets as of December 31, 2021, and January 1, 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 31, January 1,

Depreciation expense for the years ended December 31, 2021, January 1, 2021, and December 27, 2019, was $3.4 million, $3.5 million, and $3.2 million, respectively, and is included in selling, general and administrative costs in the accompanying consolidated statements of operations.

5. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consist of the following (in thousands):

December 31, January 1,

Accrued compensation and benefits $ 7,730 $ 6,696

Deferred employer's payroll taxes 1,780 3,560

Accrued sales, use, franchise and VAT tax 1,783 2,550

Non-cash stock compensation accrual 1,357 295

Income tax payable — 2,308

Total accrued expenses and other liabilities $ 30,297 $ 25,084

As a result of the tax deduction related to the exercise of the 2.9 million SARs in 2021, the Company has recorded an income tax receivable of $3.4 million to prepaid expenses and other current assets on the consolidated balance sheet.

THE HACKETT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. Restructuring Charges and Asset Impairments

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 a determination 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.

During 2019, the Company recorded restructuring charges of $3.3 million, which was primarily related to the reduction of staff in Europe and Australia. In addition, as a result of the decline in the Europe market and management’s efforts to focus on resources within the markets that provide the Company with the strongest growth opportunity, in 2019 the Company made the determination that the remaining investment in its Hackett Institute Enterprise Analytics Program was impaired and recorded an asset impairment of $1.2 million. See Note 7 for further discussion.

The Company did not record any restructuring charges or asset impairments in 2021.

The following table summarizes the costs incurred in connection with the 2020 and 2019 restructuring charges and asset impairments (in thousands):

Twelve Months Ended

January 1, December 27,

Lease right-of-use asset impairment charges 3,545 -

Property, equipment and lease improvement impairment charges 340 1,180

Other lease related restructuring costs 893 422

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

7. Lease Commitments

Effective December 29, 2018, the Company adopted the new lease accounting standard. 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 HACKETT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. Lease Commitments (continued)

The weighted average remaining lease term is 1.0 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 31, 2021, the Company paid $2.6 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 31, 2021, January 1, 2021, and December 27, 2019, was $1.0 million, $2.5 million and $2.8 million, respectively. The components of lease expense during the fiscal years ended December 31, 2021, January 1, 2021, and December 27, 2019, all related to operating lease costs.

Future minimum lease commitments under non-cancelable operating leases as of December 31, 2021, are as follows (in thousands):

Rental

Payments

Thereafter —

As of December 31, 2021, the Company does not have any additional operating leases that have not yet commenced that create significant rights and obligations for the Company.

8. Credit Facility

The Company entered into a credit agreement with Bank of America, N.A. ("Bank of America"), pursuant to which Bank of America agreed to lend the Company up to $45.0 million pursuant to a revolving line of credit (the “Revolver”) with a maturity date of May 9, 2021 (the “Credit Agreement”).

On April 3, 2020, the Company amended the Credit Agreement with Bank of America to extend the maturity date to November 30, 2022. The amendment also increased the interest payable on outstanding loans in respect to the Revolver 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.

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, a 100% pledge of the capital stock of the U.S. Subsidiaries, and a 66% pledge of the capital stock of Hackett’s direct foreign subsidiaries (subject to certain exceptions).

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 LIBOR base rate, plus an applicable margin percentage. The applicable margin percentage is based on the consolidated leverage ratio, as defined in the Credit Agreement. As of December 31, 2021, the applicable margin percentage was 1.50% per annum based on the consolidated leverage ratio, in the case of LIBOR rate advances, and 0.75% per annum, in the case of base rate advances. The interest rate of the commitment fee as of December 31, 2021, was 0.125%.

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 31, 2021, the Company was in compliance with all covenants.

The Company incurred $4 thousand and $21 thousand of incremental debt issuance costs in 2021 and 2020 as a result of the credit agreement discussions and the 2020 extension. No debt issue costs were incurred in 2019. As of December 31, 2021, the Company had $47 thousand of debt issuance costs remaining which will be amortized over the remaining life of the Credit Facility. These costs are included in Prepaid expenses and other current assets in the accompanying consolidated balance sheet.

THE HACKETT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. Credit Facility (continued)

As of December 31, 2021, and January 1, 2021, the Company did not have any outstanding debt balance on the Revolver. During fiscal 2019, the Company borrowed $1.0 million and paid down $7.5 million,leaving no outstanding balance as of December 27, 2019.

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 2017 and all significant state, local and foreign matters have been concluded for years through 2016.

The components of income before income taxes from continuing operations are as follows (in thousands):

Year Ended

December 31, January 1, December 27,

Income from continuing operations before income taxes $ 46,381 $ 8,516 $ 31,027

The components of income tax expense from continuing operations are as follows (in thousands):

Year Ended

December 31, January 1, December 27,

Current tax expense

Deferred tax expense (benefit)

Income tax expense from continuing operations $ 4,829 $ 2,871 $ 7,744

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 31, January 1, December 27,

U.S. statutory income tax expense rate 21.0 % 21.0 % 21.0 %

State income taxes, net of federal income tax expense 1.6 6.8 4.3

Valuation reduction 0.1 (0.6 ) 1.2

Meals and entertainment — 0.6 0.5

Foreign rate differential 0.3 0.9 —

Share based compensation (13.2 ) 2.4 (1.3 )

Purchase accounting — — (0.8 )

Foreign exchange loss (0.1 ) 0.2 0.2

The components of the net deferred income tax asset (liability) are as follows (in thousands):

Year Ended

December 31, January 1,

Deferred income tax assets:

HCKT US Equity

HCKT · 10-K · period ended 2021-12-31

ITEM 1A.RISK FACTORS

ITEM 1B.UNRESOLVED STAFF COMMENTS

ITEM 2.PROPERTIES

ITEM 3.LEGAL PROCEEDINGS

ITEM 4.MINE SAFETY DISCLOSURES

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

ITEM 6. [RESERVED]

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

HCKT US Equity☆

HCKT · 10-K · period ended 2021-12-31

ITEM 1A.RISK FACTORS

ITEM 1B.UNRESOLVED STAFF COMMENTS

ITEM 2.PROPERTIES

ITEM 3.LEGAL PROCEEDINGS

ITEM 4.MINE SAFETY DISCLOSURES

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

ITEM 6. [RESERVED]

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

HCKT US Equity