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Item 7. Management’s Discussion and Analysis

2022-03-04 compared with 2021-03-12 · 104 added, 251 removed, 110 unchanged (76% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

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In the following discussion, Strategy and Business Transformation Group includes the results of our North America IP as-a-service offerings, which include our Executive Advisory Programs and Benchmarking Services, and our Business Transformation Practices (S&BT).

ERP, EPM and Analytics Solutions includes the results of our North America Oracle EEA and SAP Solutions Practices (EEA).

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.

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Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business confidence.

Despite the disruption in March 2020, the COVID-19 pandemic did not have a significant impact on our consolidated results of operations during the first quarter of 2020.

However, 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, and we expect negative impacts to continue until economic conditions improve.

A prolonged economic downturn as a result of the COVID-19 pandemic or otherwise, weak or uncertain economic conditions or similar factors could adversely affect our clients’ financial condition which may further reduce our clients’ demand for our services.

We are actively managing our business to respond to the impact of the COVID-19 pandemic.

We have reduced employee headcount and employee travel to only essential business needs and most of our employees have been working remotely from home.

We are generally following the requirements and protocols published by the U.S.

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.

We cannot predict when or how we will begin to lift the actions put in place.

As a response to the ongoing COVID-19 pandemic, we have implemented plans to manage our costs and preserve cash.

We have significantly limited the addition of new employees and third party contracted services, eliminated all travel except where necessary to meet customer needs, and limited discretionary spending.

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.

All client concessions and accounts receivable allowances have been appropriately reflected in our financial statements.

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.

To the extent the business disruption continues for an extended period, additional cost management actions will be considered.

All future asset impairment charges, increases in allowance for doubtful accounts, or restructuring charges will be dependent on the severity and duration of the pandemic.

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

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

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 significantly from those estimates under different assumptions and conditions.

We believe the following discussion addresses our most critical accounting policies.

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

We generate substantially all of our revenue from providing professional services to our clients.

We also generate revenue from software licenses, software support and maintenance, as well as subscriptions to our executive and best practices advisory programs.

A single contract could include one or multiple performance obligations.

For those contracts that have multiple performance obligations, we allocate the total transaction price to each performance obligation based on its relative standalone selling price.

We determine the standalone selling price based on the respective selling price of the individual elements when they are sold separately.

Revenue is recognized when control of the goods and services provided are transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods and services using the following steps:

1) identify the contract, 2) identify the performance obligations, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and 5) recognize revenue as or when we satisfy the performance obligations.

We typically satisfy our performance obligations for professional services over time as the related services are provided.

The performance obligations related to software support, maintenance and subscriptions to our executive and best practice advisory programs are typically satisfied evenly over the course of the service period.

Other performance obligations, such as software licenses, are satisfied at a point in time.

We generate our revenue under four types of billing arrangements:

fixed-fee (including software license revenue);

time-and-materials;

executive and best practice advisory services;

and software sales, maintenance and support.

In fixed-fee billing arrangements, which would also include contracts with capped fees, we agree to a pre-established fee or fee cap in exchange for a predetermined set of professional services.

We set the fees based on our estimates of the costs and timing for completing the engagements.

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.

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.

The customer is invoiced based on the contractual agreement between the parties, typically bi-weekly, monthly or milestone driven, with net thirty-day terms.

Time-and-material billing arrangements require the client to pay based on the number of hours worked by our consultants at agreed upon hourly rates.

We recognize revenue under time-and-material arrangements as the related services or goods are provided, using the right to invoice practical expedient which allows us to recognize revenue in the amount based on the number of hours worked and the agreed upon hourly rates.

The customer is invoiced based on the contractual agreement between the parties, typically bi-weekly, monthly or milestone driven, with net thirty-day terms.

Advisory services contracts are typically in the form of a subscription agreement which allows the customer access to our executive and best practice advisory programs.

There is typically a single performance obligation and the transaction price is the contractual amount of the subscription agreement.

Revenue from advisory service contracts is recognized ratably over the life of the agreements.

Customers are typically invoiced at the inception of the contract, with net thirty-day terms.

The resale of software and maintenance contracts are in the form of SAP America software license or maintenance agreements provided by SAP America.

SAP is the principal and we are the agent in these transactions as we do not obtain title to the software and maintenance which is sold simultaneously.

The transaction price is our 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.

Expense reimbursements that are billable to clients are included in total revenue and are substantially all billed as time-and-material billing arrangements.

Therefore, we recognize all reimbursable expenses as revenue as the related services are provided, using the right to invoice practical expedient.

Reimbursable expenses are recognized as expenses in the period in which the expense is incurred.

Any expense reimbursements that are billable to clients under fixed-fee billing arrangements are recognized in line with the proportionate performance approach.

The payment terms and conditions in our customer contracts vary.

The agreements entered into in connection with a project, whether time-and-materials-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 typically contractually required to pay for all time, materials and expenses incurred by us through the effective date of the termination.

In addition, from time to time we enter into agreements with our clients that limit its ability to enter into business relationships with specific competitors of that client for a specific time period.

These provisions typically prohibit us from performing a defined range of services which it might otherwise be willing to perform for potential clients.

These provisions are generally limited to three to six 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 we are not yet entitled to bill because of 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, “Accounts Receivable and Contract Assets, Net” and Note 5 “Accrued Expenses and Other Liabilities” to our

consolidated financial statements included in this Annual Report on Form 10-K.

During the 12 months ended January 1 , 20 21 , we recognized $ 9.2 million of revenue as a result of changes in the contract liability balance, as compared to $ 7 .

7 million for the twelve months ended December 2 7 , 201 9 , respectively.

The following table reflects our disaggregation of revenue before reimbursements from continuing operations for the twelve months ended January 1, 2021, December 27, 2019 and December 28, 2018:

Software license sales

Revenue before reimbursements from continuing operations

Capitalized Sales Commissions

Sales commissions earned by our 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.

We 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 condensed consolidated statements of operations.

As of January 1, 2021 and December 27, 2019, we had $1.5 million, and $1.6 million, respectively, of deferred commissions, of which $1.5 million and $1.4 million, respectively, was amortized during the twelve months ended January 1, 2021 and December 27, 2019, respectively.

No impairment loss was recognized relating to the capitalization of deferred commission.

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.

We do 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, we recognize 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.

Allowances for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from our clients not making required payments.

Periodically, we review accounts receivable to assess our estimates of collectability.

Management 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 our clients were to deteriorate, resulting in their inability to make payments, additional allowances may be required.

Long-Lived Assets (excluding Goodwill and Other 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, we utilize fair values in determining the carrying values of the purchased assets and assumed liabilities, which 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 for up to one year after the closing date of an acquisition as information relative to closing date fair values become available.

A bargain purchase gain on an acquisition occurs when the net of the estimated fair value of the assets acquired and liabilities assumed exceeds the consideration paid.

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 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 and are subject to impairment evaluations.

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.

The reporting units are The Hackett Group (including Benchmarking, Business Transformation, Business Transformation EPM, Strategy and Operations, Executive Advisory Programs and Robotics Process Automation) and Hackett Technology Solutions (including SAP ERP and AMS, Oracle EPM and EPM AMS).

In assessing the recoverability of goodwill and intangible assets, we make estimates based on assumptions regarding various factors to determine if impairment tests are met.

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.

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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, 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.

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.

Other intangible assets arise from business combinations and consist of customer relationships, customer backlog, non-compete agreements and trademarks that are amortized on a straight-line or accelerated basis over periods of up to five years.

Stock Based Compensation

We recognize compensation expense for awards of equity and liability instruments to employees based on the grant-date fair value of those awards, over the requisite service period, with limited exceptions.

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 we believe 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 our judgment about the realizability of the related deferred tax asset, is included in the current tax provision.

We 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.

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.

We report penalties and tax-related interest expense as a component of income tax expense.

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 2020, 2019 and 2018, ended on January 1, 2021, December 27, 2019, and December 28, 2018, respectively.

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.

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Non-cash stock compensation expense

Acquisition-related costs

Amortization of intangible assets

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Restructuring charges and asset impairments

Acquisition-related contingent consideration liability

Total costs and operating expenses

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Comparison of 2021 to 2020

For fiscal year 2020, revenue before reimbursements decreased 10% to $234.8 million, as compared to fiscal year 2019.

Fiscal year 2020 results included restructuring charges for the reduction of staff in the U.S.

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.

Fiscal year 2019 results included restructuring charges relating to the reduction of staff in Australia and Europe and the impairment of assets related to the Hackett Institute’s Enterprise Analytic Program.

Together, these items negatively impacted dilutive earnings per share by $0.12.

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, Euro and Australian Dollar, and as a result is affected by currency exchange rate fluctuations.

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.

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Revenue from continuing operations before reimbursement

Our total Company revenue from continuing operations and before reimbursements decreased 10%, to $234.8 million in 2020, as compared to $260.8 million in 2019.

Our North American revenue from continuing operations and before reimbursements decreased 6% and our international revenue from continuing operations and before reimbursements decreased 36% in 2020, as compared to 2019.

Net revenue and reimbursable expenses were both affected from the economic disruption of the COVID-19 pandemic and as we transitioned to a remote service delivery model throughout the U.S.

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 2% in 2020, as compared to 8% in 2019.

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 decreased 17% in 2020, to $88.7 million as compared to $107.1 million in 2019.

This group’s business transformation practice was disrupted by the impact of the pandemic.

EEA net revenue from continuing operations increased 5% in 2020, to $122.6 million, as compared to $116.9 million in 2019, primarily driven by strong growth in our SAP S4 HANA implementation and Reseller practices, as well as our Oracle Cloud ERP and OneStream practices.

The strong growth was partially offset by declines in our Oracle EPM practice.

net revenue from continuing operations represented 90% of our total Company net revenue during 2020 and as compared to 86% in 2019.

Hackett international net revenue from continuing operations decreased 36% in 2020, as compared to 2019.

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 increased 1% 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.

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and reimbursable expenses associated with projects.

Personnel costs from continuing operations decreased 3%, to $154.3 million in 2020, from $159.4 million in 2019.

The decrease in personnel costs in 2020 were primarily due to the restructuring actions that were implemented in 2020 which included a reduction of approximately 10% of the global workforce.

Personnel costs before reimbursable expenses and as a percentage of revenue before reimbursements 66% in 2020, as compared to 61% in 2019.

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.

This increase was primarily driven by a new retention-based non-cash incentive compensation program effective in 2020 for our key practice leaders.

Historically, annual performance grants are amortized over a three-year vesting period after the performance year.

However, due to competitive market conditions for these key employees, a program change was effected whereby 50% of their annual performance stock opportunity was granted based on the achievement of certain non-financial objectives and the grants vest at the end of the performance year, assuming the objectives were met.

In addition, there were some acceleration of expense associated with COVID-19 related terminations and the finalization of the Jibe acquisition earnout liability.

See Note 10, “Stock Based Compensation” to our consolidated financial statements included in this Annual Report on Form 10-K for further information.

The acquisition related compensation expense in 2020 and compensation benefit in 2019 both related to the accrual for the cash portion of contingent consideration related to acquisitions, all of which was subject to service vesting and as a result is recorded as compensation expense.

The majority of these liabilities were settled during the fourth quarter of 2019.

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 decreased 13% to $50.6 million in 2020, from $58.1

million in 201 9 primarily due to decreased travel related selling and marketing activities due to the move to virtual sales and delivery models resulting from the pandemic .

SG&A costs as a percentage of revenue before reimbursements were 22% in both 20 20 and 201 9 .

Non-cash compensation expense included in total SG&A decreased to $2.4 million in 2020, as compared to $2.9 million in 2019.

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 in 2017.

The intangible assets related to the acquisitions will continue to amortize until 2022 and the intangible asset related to the joint venture will continue to amortize until 2021.

Acquisition-contingent Consideration Liability.

During 2019, the liabilities related to the cash portion of the Jibe acquisition contingent consideration due to selling shareholders, which was not subject to service vesting, was reduced based on the estimated achievement of the contingent earnout targets, resulting in a benefit.

The liability was settled in the fourth quarter of 2019.

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.

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 Charg es 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 .

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.

In 2019, we recorded restructuring charges of $3.3 million primarily related to the continued weakness in our international operations.

These costs primarily related to severance costs as we reduced staff to be commensurate with current demand primarily in both Australia and Europe.

In addition, in 2019, we recorded a $1.2 million restructuring charge related to the asset impairment of our investment in the Hackett Institute’s Enterprise Analytics Program.

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.

The decrease was due to the lower average outstanding debt balance.

The debt was fully paid off during the fourth quarter of 2019 and there was no outstanding debt in 2020.

Income Taxes.

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.

During 2019, we recorded $7.7 million of income tax expense related to certain federal, foreign and state taxes which reflected an effective tax rate of 25.0% from continuing operations.

The increase in the tax rate for 2020 was primarily due to lower tax benefits related to share-based compensation when compared to 2019.

In addition, the tax rate increase in 2020 related to 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.

Comparison of 2019 to 2018

For fiscal year 2019, revenue from continuing operations and before reimbursements decreased 1% to $260.8 million, as compared to fiscal year 2018.

Fiscal year 2019 results included restructuring charges and the impairment of an asset related to the Hackett Institute’s Enterprise Analytic Program.

Together, these items negatively impacted dilutive earnings per share by $0.12.

Fiscal year 2018 results included discontinued operations related to the discontinuance of our European REL Working Capital group and the impairment of assets primarily related to our investments in the Hackett Performance Exchange.

Together these items negatively impacted dilutive earnings per share by $0.23.

Fiscal 2018 had a more favorable tax rate as a result of the 2017 Tax Cuts and Jobs Act, which reduced corporate tax rates from 35% to 21%.

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, Euro and Australian Dollar, 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 2019 and 2018.

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):

International

Revenue from continuing operations before reimbursement

Our total Company revenue before reimbursements decreased 1%, to $260.8 million in 2019, as compared to $264.5 million in 2018.

Our North American revenue from continuing operations and before reimbursements increased 3% and our international revenue from continuing operations and before reimbursements decreased 21% in 2019, as compared to 2018.

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 8% during both 2019 and 2018.

In 2019 and 2018, no customer accounted for more than 5% of our total revenue.

S&BT net revenue from continuing operations increased 3% in 2019, to $107.1 million as compared to $104.1 million in 2018, primarily driven by improved results across most practices.

EEA net revenue from continuing operations increased 3% in 2019, to $116.9 million, as compared to $114.0 million in 2018, primarily driven by strong results in our SAP and OneStream practices, as well as strong cloud revenue growth from our EPM practices, partially offset by the Oracle EPM On-Premise declines.

Hackett international net revenue from continuing operations decreased 21% in 2019, as compared to 2018.

This decrease in revenue, which is primarily derived in Europe, was largely due to the uncertainties surrounding Brexit which appears to have impacted client decision making.

Total Company international net revenue from continuing operations accounted for 14% of our total revenue in 2019, as compared to 18% in 2018.

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 were $159.4 million in 2019 from $159.6 million in 2018.

Personnel costs before reimbursable expenses, as a percentage of revenue before reimbursements were 61% in 2019 and 60% in 2018.

Non-cash stock compensation expense from continuing operations was $3.8 million in both 2019 and 2018.

See Note 10, “Stock Based Compensation” to our consolidated financial statements included in this Annual Report on Form 10-K for further information.

The acquisition related compensation benefit of $0.1 million and $0.5 million in 2019 and 2018, respectively, related to the liability for the cash portion of the Aecus contingent consideration that was to be paid to the selling shareholders and key personnel, and the cash portion of the Jibe contingent consideration that is to be paid to key personnel, all of which are subject to service vesting and as a result is recorded as compensation expense.

See Note 15, “Acquisitions” to our consolidated financial statements included in this Annual Report on Form 10-K.

These liabilities were both settled in 2019.

Acquisition related non-cash stock compensation expense in 2019 and 2018 primarily related to our EPM AMS acquisition of Technolab in fiscal 2014 and the Jibe and Aecus acquisitions in 2017.

See Note 15, “Acquisitions” to our consolidated financial statements included in this Annual Report on Form 10-K.

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 decreased 1% to $58.1 million in 2019, from $58.5 million in 2018.

SG&A costs as a percentage of revenue before reimbursements were 22% in both 2019 and 2018.

Non-cash compensation expense included in total SG&A decreased to $2.9 million in 2019, as compared to $3.2 million in 2018.

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 2019, as compared to $2.4 million in 2018.

The amortization expense in 2019 and 2018 related to the amortization of the intangible assets acquired in our acquisitions of Jibe and Aecus in the second quarter of 2017 and the buyout of our partner’s joint venture interest in the CGBS Training and Certification Programs during the fourth quarter of 2017.

The 2018 amortization expense also includes the amortization of the intangible assets acquired in our 2014 EPM AMS acquisition of Technolab.

The intangible assets relate to the customer relationship, trademarks, customer backlog and non-compete

T he Jibe and Aecus intangible assets will continue to amortize until 2022 .

The CGBS Training and Certification intangible asset will amortize until 2021 .

Acquisition-contingent Consideration Liability.

During 2019 and 2018, the liability related to the cash portion of the Jibe acquisition contingent consideration due to selling shareholders, which is not subject to service vesting, was reduced based on the estimated achievement of the contingent earnout targets, resulting in a benefit.

The liability was settled during 2019.

Restructuring Charges and Asset Impairments.

In 2019, we recorded restructuring costs of $3.3 million primarily related to the continued weakness in our international operations.

These costs primarily related to severance costs as we reduced staff to be commensurate with current demand primarily in both Australia and Europe.

In addition, in 2019, we recorded a $1.2 million restructuring charge, related to the asset impairment of our investment in the Hackett Institute’s Enterprise Analytics Program.

In 2018, we recorded a $6.3 million restructuring charge related to the asset impairment of our investments in the Hackett Performance Exchange and our Working Capital Course.

Interest Expense .

In 2019, we recorded interest expense of $311 thousand, as compared to $638 thousand in 2018, primarily due to the lower average outstanding debt balance.

The debt was fully paid off during the fourth quarter of 2019.

There was no outstanding debt in 2021 or 2020.

Income Taxes.

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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.

In 2018 the effective tax rate reflected a lower federal tax rate of 21% as a result of the 2017 Tax Cuts and Jobs Act.

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.

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Liquidity and Capital Resources

As of January 1, 2021 and December 27, 2019, we had $49.5 million and $26.0 million, respectively, of cash.

As of January 1, 2021 and December 27, 2019, we had 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 working capital and capital expenditure requirements for at least the next twelve months.

We may decide to raise additional funds to support expansion, to develop new or enhance products and services, to respond to competitive pressures or to acquire complementary businesses or technologies.

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.

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Net cash provided by operating activities was $46.4 million in 2021, as compared to $44.1 million in 2020.

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 and higher accrued expenses and other liabilities.

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.

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Net cash used in investing activities was $3.2 million in 2021, as compared to $1.9 million in 2020.

During 2020, cash flows from investing activities included investments related to the continued development of our Quantum Leap benchmark technologies.

In the comparable 2019 period, cash flows used in investing activities included investments to our internal corporate systems, the rollout of new laptops, and the development of our Quantum Leap benchmark technologies.

In addition, in 2019 the Jibe earnout consideration with the selling shareholders was finalized and settled.

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 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.

The usage of cash in 201 9 was primarily related to the dividend payment s of $1 1.2 million, the net paydown of the revolving line of credit of $ 6.5 million , the repurchase of Company common stock under our share repurchase program of $5.3 million and employee net vesting related tax withholding requirements of $2.5 million .

As of January 1, 2021, we did not have any outstanding borrowings under the Revolver, leaving us with a capacity of approximately $45.0 million.

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.

Contractual Obligations

There were no material capital commitments as of January 1, 2021.

The following table summarizes our future principal payments under our credit facility (See Note 8 to our consolidated financial statements included in this Annual Report on Form 10-K) and future lease commitments under our non-cancelable operating leases as of January 1, 2021 (in thousands):

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

Short-term debt obligations (1)

Long-term debt obligations (1)

More Than 1 Year

Operating lease obligations

Excludes the fee on the amount of any unused commitment that we may be obligated to pay under our credit facility, as such amounts vary and cannot be estimated.

See Note 8 to our consolidated financial statements included in this Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of January 1, 2021.

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.

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 .

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.

Recently Issued Accounting Standards

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis