| Basis of Presentation and General Information | 1. B asis of Presentation and General Information Basis of Presentation The accompanying consolidated financial statements of The Hackett Group , Inc. (“Hackett” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the Company’s accounts and those of its wholly-owned subsidiaries which the Company is required to consolidate. All intercompany transactions and balances have been eliminated in the consolidation. In the opinion of management, the accompanying consolidated financial statements reflect all normal and recurring adjustments which are necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows as of the dates and for the periods presented. The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, these statements do not include all the disclosures normally required by U.S. GAAP for annual financial statements and should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 29, 2023, included in the Annual Report on Form 10-K filed by the Company with the SEC on March 1, 2024. The consolidated results of operations for the quarter and nine months ended September 27, 2024 , are not necessarily indicative of the results to be expected for any future period or for the full fiscal year. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Business Combination On September 16, 2024, the Company executed an agreement to acquire 100 % of the equity of LeewayHertz Technologies Private Limited (“LeewayHertz”), a technology consulting company based in India, focused on artificial intelligence (A.I.) technology solutions for a provisional purchase consideration of $ 7.8 million subject to a working capital achievement. This acquisition marks a significant milestone in the Company's aggressive strategy to become a leading architect of its clients' Gen A.I. journey. The acquisition closed on September 23, 2024. Leeway’s founder, one of LeewayHertz ’s owners, was hired by the Company to serve as its executive vice president of the A.I. practice. The following table summarizes the provisional fair value of the assets acquired and liabilities assumed:
Amount
Assets / Liabilities (in thousands)
Cash $ 1,020
Current assets 2,081
Intangible assets 2,800
Current liabilities ( 2,587 )
Net assets acquired $ 3,314
Consideration $ 7,806
Goodwill $ 4,492 As a result, the provisional excess of the purchase price over the assets acquired resulted in goodwill of $ 4.5 million. Additionally, the Company recognized provisional intangible assets of $ 2.8 million, with a remaining weighted average useful life of 4.7 years. The fair values of identifiable intangible assets acquired were prepared by a third-party valuation specialist and incorporate significant unobservable inputs, judgment, and estimates, including the amount and timing of future cash flows. The intangible assets will be amortized in accordance with the Company’s accounting policies. The following table summarizes the preliminary value of the intangible assets: 1. Basis of Presentation and General Information (continued)
Amount Useful Life
Category (in thousands) (in years)
Customer Relationships $ 2,500 5
Technology 200 2
Non-Compete 100 2
Total $ 2,800 The Company recognized $ 53 thousand of transactions costs related to the acquisition and no amortization was recorded in the three months ended September 27, 2024. The amounts recorded for certain assets and liabilities and related disclosures are preliminary in nature and are subject to adjustment as additional information is obtained about their acquisition date fair values. Since the acquisition was only recently completed, the allocation of the purchase price is preliminary and will likely change in future periods as fair value estimates of the assets acquired and liabilities assumed are finalized, including those primarily related to working capital, property and equipment, intangible assets, and taxes. The final determination of the fair values will be completed within the one-year measurement period. Also, in connection with the acquisition, the Company and LeewayHertz ’s founder are creating a joint venture whereby The Hackett Group will contribute its AI XPLR platform and LeewayHertz will contribute its ZBrain platform. The integration of AI XPLR and the ZBrain Gen A.I. orchestration solution will enable the joint venture to provide advanced and tailored Gen AI solutions to its clients. The joint venture is expected to be formed by the end of the Company's fiscal year 2024. Segment Reporting Segments are defined as components of a company that engage in business activities from which they earn revenue and incur expenses, and for which separate financial information is available and is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company assesses its operating segments under the management approach in accordance with ASC 280, "Segment Reporting" (ASC 280), and has determined that it has three operating segments: Global S&BT, Oracle Solutions and SAP Solutions which are also its reportable segments. See Note 11 “Segment Information and Geographical Data” for detailed segment information. Goodwill and Other Intangible Assets For acquisitions accounted for as a business combination, goodwill represents the excess of the cost over the fair value of the net assets acquired. The Company has organized its operating and internal reporting structure to align with its primary market solutions. In accordance with ASC 280, management made the determination to present three operating segments, three reportable segments and three reporting units as follows: (1) Global S&BT, (2) Oracle Solutions, and (3) SAP Solutions. Global S&BT includes the results of the Company’s Gen A.I. and strategic business consulting practices; Oracle Solutions includes the results of the Company’s Oracle EPM/ERP and Digital AMS practices; SAP Solutions includes the Company’s SAP applications and related SAP service offerings. A reporting unit is an operating segment or one level below an operating segment to which goodwill is assigned. The goodwill was allocated to the reporting unit based on the reporting unit's relative fair value. The carrying amount of goodwill by reporting unit is as follows, which includes the provisional goodwill allocated to the LeewayHertz acquisition (in thousands):
Foreign
December 29, Additions/ Currency September 27,
2023 Adjustments Translation 2024
Global S&BT $ 57,550 $ 4,492 $ 683 $ 62,725
Oracle Solutions 16,699 — — 16,699
SAP Solutions 9,993 — — 9,993
Goodwill $ 84,242 $ 4,492 $ 683 $ 89,417 1. Basis of Presentation and General Information (continued) Revenue Recognition The Company primarily generates its revenue from providing professional services to its clients. The Company also generates revenue from software sales, software maintenance and support and subscriptions to its executive and best practices advisory programs. A single contract could include one or multiple performance obligations. For those contracts that have multiple performance obligations, the Company allocates the total transaction price to each performance obligation based on its relative standalone selling price. The Company determines the standalone selling price based on the respective selling price of the individual elements when sold separately. Revenue is recognized when control of the goods and services provided are transferred to the Company’s customers, in an amount that reflects the consideration it expects to be entitled to in exchange for those goods and services using the following steps: 1) identify the contract, 2) identify the performance obligations, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and 5) recognize revenue as or when the Company satisfies the performance obligations. The Company typically satisfies its performance obligations for professional services over time as the related services are provided. The performance obligations related to software maintenance and support and subscriptions to its executive and best practice advisory programs are typically satisfied evenly over the course of the service period. Other performance obligations, such as software sales, are satisfied at a point in time. The Company generates revenue under four types of billing arrangements: fixed-fee; time-and-materials; executive and best practice advisory services; and software sales and software maintenance and support. In fixed-fee billing arrangements, which would also include contracts with capped fees, the Company agrees to a pre-established fee or fee cap in exchange for a predetermined set of professional services. The Company sets the fees based on its estimates of the costs and timing for completing the engagements. The Company generally recognizes revenue under fixed-fee or capped fee arrangements using a proportionate performance approach, which is based on work completed to-date as compared to estimates of the total services to be provided under the engagement. Estimates of total engagement revenue and cost of services are monitored regularly during the term of the engagement. If the Company’s estimates indicate a potential loss, such a loss is recognized in the period in which the loss first becomes probable and reasonably estimable. The customer is invoiced based on the contractual agreement between the parties, typically bi-weekly, monthly or milestone driven, with net thirty or sixty-day terms, however client terms are subject to change. Time-and-material billing arrangements require the client to pay based on the number of hours worked by the Company’s consultants at agreed hourly rates. The Company recognizes revenue under time-and-material arrangements as the related services or goods are provided, using the right to invoice practical expedient which allows it to recognize revenue in the amount based on the number of hours worked and the agreed upon hourly rates. The customer is invoiced based on the contractual agreement between the parties, typically bi-weekly, monthly or milestone driven, with net thirty or sixty-day terms, however client terms are subject to change. Advisory services contracts are typically in the form of a subscription agreement which allows the customer access to the Company’s executive and best practice advisory programs. There is typically a single performance obligation and the transaction price is the contractual amount of the subscription agreement. Revenue from advisory services contracts is recognized ratably over the life of the agreements. Customers are typically invoiced at the inception of the contract, with net thirty or sixty-day terms, however client terms are subject to change. The resale of on-premise software, cloud software and maintenance contracts are in the form of SAP America ("SAP") software or maintenance agreements provided by SAP. SAP is the principal and the Company is the agent in these transactions as the Company does not obtain title to the software and maintenance which is sold simultaneously. The transaction price is the Company’s agreed-upon percentage of the software sale for either on-premise software or cloud software or maintenance amount in the contract with the vendor. Revenue for the resale of software is recognized upon contract execution and customer’s receipt of the software. The Company also provides software maintenance on other ERP systems, primarily Oracle. Revenue from maintenance contracts is recognized ratably over the life of the agreements. The customer is typically invoiced at contract inception, with net thirty or sixty-day terms, however client terms are subject to change. Revenue before reimbursements excludes reimbursable expenses charged to clients. Reimbursements, which include travel and out-of-pocket expenses, are included in revenue, and an equivalent amount of reimbursable expenses is included in the cost of service. Expense reimbursements that are billable to clients are included in total revenue and are substantially all billed as time-and-material billing arrangements. Therefore, the Company recognizes all reimbursable expenses as revenue as the related services are provided, using the right to invoice practical expedient. Reimbursable expenses are recognized as expenses in the period in which the expense is incurred. Any expense reimbursements that are billable to clients under fixed-fee billing arrangements are recognized in line with the proportionate performance approach. 1. Basis of Presentation and General Information (continued) The payment terms and conditions in the Company’s customer contracts vary. The agreements entered into in connection with a project, whether time and materials-based or fixed-fee or capped-fee based, typically allow clients to terminate early due to breach or for convenience with 30 days’ notice. In the event of termination, the client is contractually required to pay for all time, materials and expenses incurred by the Company through the effective date of the termination. In addition, from time to time the Company enters into agreements with its clients that limit its right to enter into business relationships with specific competitors of that client for a specific time period. These provisions typically prohibit the Company from performing a defined range of services which it might otherwise be willing to perform for potential clients. These provisions are generally limited to six to twelve months and usually apply only to specific employees or the specific project team. Differences between the timing of billings and the recognition of revenue are recognized as either contract assets or contract liabilities in the accompanying consolidated balance sheets. Revenue recognized for services performed but not yet billed to clients is recorded as contract assets and is included within accounts receivable and contract assets. Services not yet performed, however billed to the client and uncollected at period end, are recorded as contract assets and are included within accounts receivable and contract assets. Client prepayments are classified as contract liabilities and recognized over future periods as earned in accordance with the applicable engagement agreement. See Note 3 for the accounts receivable and contract asset balances. During the quarter and nine months ended September 27, 2024, the Company recog nized $ 1.7 million and $ 10.7 million, respectively, of revenue as a result of changes in the contract liability balance, as compared to $ 1.5 million and $ 12.1 million, respectively, for the quarter and nine months ended September 29, 2023. Based on the information that management reviews internally for evaluating operating segment performance and nature, amount, timing, and uncertainty of revenue and cash flows affected by economic factors, the Company disaggregates revenue as follows for the quarters and nine months ended September 27, 2024 and September 29, 2023 (in thousands):
Quarter Ended Nine Months Ended
September 27, September 29, September 27, September 29,
2024 2023 2024 2023
Global S&BT:
North America Consulting $ 36,563 $ 37,032 $ 105,201 $ 109,642
International Consulting 7,502 6,766 22,018 20,123
Total Global S&BT $ 44,065 $ 43,798 $ 127,219 $ 129,765
Oracle Solutions:
Consulting and software support and maintenance $ 22,759 $ 20,831 $ 67,533 $ 58,774
Total Oracle Solutions $ 22,759 $ 20,831 $ 67,533 $ 58,774
SAP Solutions:
Consulting and software support and maintenance $ 10,934 $ 10,605 $ 31,576 $ 32,372
Software license sales 2,019 622 8,292 3,276
Total SAP Solutions $ 12,953 $ 11,227 $ 39,868 $ 35,648
Total segment revenue $ 79,777 $ 75,856 $ 234,620 $ 224,187
The total revenue from the Global S&BT segment, the Oracle Solutions segment and the SAP Solutions segment's consulting and software support and maintenance services is all recognized over time. The software license sales revenue included in the SAP Solutions segment is recognized at a point in time. Capitalized Sales Commissions Sales commissions earned by the Company’s sales force are considered the incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and then amortized as project revenue is recognized. The Company determined the period of amortization by taking into consideration the customer contract period, which is generally less than 12 months. Commission expenses are included in the Selling, general and administrative costs in the accompanying consolidated statements of operations. As of Decemb er 29, 2023 and December 30, 2022, the Company had $ 1.7 million and $ 1.5 million, respectively, of deferred commissions, of which $ 0.2 million and $ 0.9 million was amortized during the quarter and nine months ended September 27, 2024, respectively, and $ 0.3 million and $ 0.9 million for the same periods in 2023, respectively. No impairment loss was recognized relating to the capitalization of deferred commissions. 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. Fair Value The Company’s financial instruments consist of cash, accounts receivable and contract assets, accounts payable, accrued expenses and other liabilities, contract liabilities and long-term debt. As of September 27, 2024 and December 29, 2023, the carrying amount of each financial instrument approximated the instrument’s respective fair value due to either the short-term nature or the maturity of these instruments. The Company uses significant other observable market data or assumptions (Level 2 inputs as defined in accounting guidance) that it believes market participants would use in pricing debt. The fair value of the debt approximated the carrying amount, using Level 2 inputs, due to the short-term variable interest rates based on market rates. Recent Accounting Pronouncements In November 2023, accounting guidance was issued that requires additional disclosures of reportable segment information. The guidance requires that public entities disclose, on an annual and interim basis (1) significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and included within each reported measure of segment profit or loss, (2) an amount for other segment items by reportable segment and a description of its composition, (3) provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by Topic 280 in interim periods, (4) clarify that if the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, a public entity may report one or more of those additional measures of segment profit; at least one of the reported segment profit or loss measures should be the measure that is most consistent with the measurement principles used in measuring the corresponding amounts in the public entity’s consolidated financial statements, (5) the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and in deciding how to allocate resources, and (6) if a public entity has a single reportable segment to provide all the disclosures required by the amendments in this update and all existing segment disclosures in Topic 280. The amendments in this update do not change how operating segments are identified or aggregated nor how the quantitative thresholds are applied to determine its reportable segments. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments in this update should be applied retrospectively to all prior periods presented in the financial statements. Upon transition, the segment expense categories and amounts disclosed in t he prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption. The Company is currently evaluating the impact the adoption of this accounting standard update will have on its footnote disclosures. |
