HACKETT GROUP, INC. (HCKT) FY 2024 MD&A

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 2022 items and year-to-year comparisons between fiscal years 2023 and 2022 where it would be redundant with the discussion previously included in Part II, Item 7 (MD&A) of the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2023.

Hackett is a global IP platform-based GenAI strategic consulting and executive advisory digital transformation firm. strategic consulting and digital transformation firm. The Hackett Group provides dedicated expertise in Gen AI enabled enterprise transformation services across front, mid and back office areas, including its highly recognized Oracle, SAP, OneStream and Coupa implementation offerings.

In early 2024, we launched our AI assessment platform, AI XPLR which helps clients identify, evaluate and design Gen AI enablement opportunities. Using AI XPLR, our experienced professionals guide organizations to harness the power of Gen AI solutions designed to digitally transform their operations to achieve quantifiable, breakthrough results, allowing us to be key architects of our clients' Gen AI journey.

We believe Gen AI will fundamentally change the way companies operate as well as the way consulting services are sold and delivered. We believe the Gen AI platform capabilities we have developed in AI XPLR which were expanded with ZBrain, which we acquired as part of the LeewayHertz acquisition, is highly differentiating and we expect will enable us to effectively compete in this emerging and important space.

The Hackett Group has completed over 27,500 benchmarking and performance studies with major organizations. These studies are executed utilizing our Quantum Leap platform which drives our DTP. This includes the firm's benchmarking metrics, best practices repository, and best practice configuration and process flow accelerators, which enables our clients and partners to achieve digital world-class performance.

Our transformation expertise is grounded in best practices insights from benchmarking the world’s leading businesses – including 97% of the Dow Jones Industrials, 90% of the Fortune 100, 70% of the DAX 40 and 51% of the FTSE 100, which inform and are delivered utilizing our platforms.

Impact of Macroeconomic Conditions 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. Any deterioration in the current macroeconomic environment or economic downturn as a result of weak or uncertain economic conditions due to inflation, high interest rates, national or geopolitical events or other factors impacting economic activity or business confidence could adversely affect our clients' financial condition or outlook which may reduce the clients' demand for our services.

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.

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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

We review accounts receivable to assess our estimates of collectability regularly. 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.

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.

On September 23, 2024, the Company acquired 100% of the equity of LeewayHertz Technologies Private Limited (“LeewayHertz”), a technology consulting company based in India, focused on AI technology solutions for a provisional purchase consideration of $7.8 million subject to a working capital achievement. LeewayHertz’s founder, one of LeewayHertz’s owners, was hired by the Company to serve as its executive vice president of the AI practice.

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.

The following table summarizes the provisional fair value of the assets acquired and liabilities assumed:

As a result, the provisional excess of the purchase price over the assets acquired resulted in goodwill of $5.9 million. Additionally, the Company recognized provisional intangible assets of $2.5 million, with a remaining weighted average useful life of 4.6 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 provisional value of the intangible assets acquired:

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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 AI 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 middle of the Company's 2025 fiscal year and we expect its results will be consolidated into our financial statements.

Goodwill

For acquisitions accounted for as a business combination, goodwill represents the excess of the cost over the fair value of the net assets acquired. 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. A reporting unit is an operating segment or one level below an operating segment to which goodwill is assigned. The goodwill has been allocated to the reporting unit based on the reporting unit's relative fair value. The provisional goodwill related to LeewayHertz has been included in Global S&BT segment. The carrying amount of goodwill by reporting unit is as follows (in thousands):

Goodwill is tested at least annually for impairment at the reporting unit level utilizing the market approach. In assessing the recoverability of goodwill and intangible assets, the Company utilizes the market approach and makes estimates based on assumptions regarding various factors to determine if impairment tests are met. The market approach utilizes valuation multiples based on operating data from publicly traded companies within the same industry. Multiples derived from guideline companies provide an indication of how much a market participant would be willing to pay for a company. These multiples are then applied to the Company’s reporting units to arrive at an indication of value. This approach contains management’s judgment, using appropriate and customary assumptions available at the time.

We performed our annual impairment test of goodwill in the fourth quarter of fiscal years 2024, 2023 and 2022 and determined that goodwill was not impaired.

Stock Based Compensation

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

In September 2024, a stock price award program was offered to certain leaders. These equity awards were granted with both a market condition (three tranches, each with varying market share price thresholds) and service conditions. The Company measured these equity awards using the Monte Carlo valuation model to determine the fair value as of the grant date. The Monte Carlo valuation model, using different share price paths, calculated a derived service period which is the median share price path on which the market condition is satisfied for each tranche. The assumptions utilized in the model are as of a point in time and may differ from the actual value of the equity awards. The requisite service period was determined to be service conditions as the service conditions are greater than the derived service period. For each of the three tranches, stock compensation expense is recognized on a straight-line basis over the requisite service period. The Company has elected to account for forfeitures as incurred. If an employee forfeits nonvested shares subsequent to meeting a service condition, the previously recognized expense is not reversed. See Note 10, "Stock Based Compensation," for additional information.

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 2024 and 2023 ended on December 27, 2024 and December 29, 2023, respectively, each consisted of a 52-week period. References to a year included in this document refer to a fiscal year rather than a calendar year.

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The following table sets forth, for the periods indicated, our results of operations (in thousands):

Comparison of 2024 to 2023

Overview. For fiscal year 2024, total revenue increased to $313.9 million, as compared to $296.6 million in 2023, primarily driven by increased total revenue from our SAP Solutions segment of $10.2 million and our Oracle Solutions segment of $7.9 million, as compared to 2023.

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 2024 and 2023. Revenue is analyzed based on geographic location of engagement team personnel.

In 2024, one customer accounted for 11% of our total revenue and in 2023 one customer accounted for 6% of our total revenue.

Segment revenue. We have three reportable segments: Global S&BT, Oracle Solutions and SAP Solutions. Global S&BT includes S&BT Consulting, Benchmarking, Advisory Services, IPASS, Gen AI Consulting and Implementation, OneStream and our Coupa offerings. Oracle Solutions and SAP Solutions support the two fundamentally distinct ERP systems: Oracle and SAP.

The following table sets forth total revenue by reportable operating segment, which includes reimbursable expenses related to project travel-related expenses passed through to a client with no associated operating margin (in thousands):

Global S&BT total revenue decreased to $171.1 million in 2024, as compared to $171.9 million in 2023. The revenue decrease was primarily due to weakness in our eProcurement and OneStream implementation offerings. This was partially offset by growth in

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our Gen AI consulting and implementation offerings, driven by the capabilities of our AI XPLR platform and our recently acquired ZBrain platform and LeewayHertz consulting and implementation team.

Oracle Solutions total revenue increased to $85.7 million in 2024, as compared to $77.8 million in 2023. The segment has continued the momentum it has experienced since the second quarter of 2023, as we have continued to see strong overall EPM activity resulting from Oracle’s re-establishment of their dedicated EPM salesforce.

SAP Solutions total revenue increased to $57.1 million in 2024, from $46.9 million in 2023. The revenue growth in 2024 was due to the strong software-related sales resulting from the increased sales investments we made in late 2023.

Reimbursements as a percentage of total revenue were 2.2% in 2024 and 1.8% in 2023. Reimbursements are project travel-related expenses passed through to a client with no associated operating margin.

Cost of Service. Cost of service consists of personnel costs before reimbursable expenses, which includes salaries, benefits and incentive compensation for consultants and subcontractor fees, acquisition-related cash and stock compensation costs, non-cash stock compensation expense, and reimbursable expenses which are travel and other expenses passed through to a client and are associated with projects.

Personnel costs before reimbursable expenses, increased to $183.8 million in 2024, as compared to $174.9 million in 2023. The higher costs in 2024 were primarily a result of increased salaries relating to increased headcount, higher utilization of subcontractors and increases in non-cash stock compensation expense. Personnel costs as a percentage of total revenue were 59% in both 2024 and 2023.

Non-cash stock-based compensation expense, included in personnel costs before reimbursable expenses, was $10.5 million in 2024 and $6.2 million in 2023. This increase was primarily related to the stock price award program and the acquisition related non-cash stock compensation expense related to LeewayHertz. See Notes 1 and 10, "Basis of Presentation and General Information” and “Stock Based Compensation”, respectively, to our consolidated financial statements included in this Annual Report on Form 10-K for more information.

Selling, General and Administrative Costs (“SG&A”). SG&A primarily consists of salaries, benefits and incentive compensation for the selling, marketing, administrative and executive employees, non-cash compensation expense, amortization of intangible assets, acquisition-related costs and various other overhead expenses.

SG&A costs increased 19%, to $78.5 million in 2024, as compared to $65.9 million in 2023. This increase in the costs during 2024 was primarily due to increased commissions and sales related expenses, increased incentive compensation commensurate with Company performance and increased non-cash stock based compensation related to the stock price award program. SG&A costs as a percentage of total revenue were 25% and 22% during 2024 and 2023, respectively.

Non-cash stock-based compensation expense, included in SG&A, was $9.0 million in 2024, as compared to $4.5 million in 2023. The increase in 2024 primarily related to the non-cash stock compensation expense from the stock price award program. See Note 10, “Stock Based Compensation,” to our consolidated financial statements included in this Annual Report on Form 10-K for more information.

Amortization Expense. There was $148 thousand of amortization expense in 2024. There was no amortization expense included in SG&A in 2023. The amortization expense related to the amortization of the intangible asset acquired in our acquisition of Leeway Hertz in September 2024. See Note 1, “Basis of Presentation and General Information,” to our consolidated financial statements included in this Annual Report on Form 10-K for more information.

Segment Profit. Segment profit consists of the revenue generated by the segment, less the direct costs of revenue and selling, general and administrative expenses that are incurred directly by the segment. Items not allocated to the segment level include corporate costs related to administrative functions that are performed in a centralized manner that are not attributable to a particular segment. These administrative function costs include corporate general and administrative expenses, non-cash compensation, depreciation and amortization expense and interest expense.

Global S&BT segment profit decreased to $51.6 million in 2024, as compared to $54.4 million in 2023 primarily due to the revenue growth in our Gen AI consulting and implementation offerings, which were offset by weakness in our eProcurement and OneStream implementation offerings.

Oracle Solutions segment profit increased to $19.1 million in 2024, as compared to $18.1 million in 2023, primarily due to higher revenue, partially offset by increased headcount and increased usage of subcontractors.

SAP Solutions segment profit increased to $18.7 million in 2024, as compared to $11.9 million in 2023, primarily due to the value-added reseller activity in the year, partially offset by higher commissions and sales related costs.

Legal Settlement and Related Costs. In May 2023, Gartner, Inc. ("Gartner") filed a lawsuit seeking a preliminary injunction and damages against the Company and two ex-Gartner employees that were hired by us. On February 17, 2024, we, Gartner and the two

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ex-Gartner employees entered into a settlement agreement whereby we made a settlement payment of $985,000 to Gartner in exchange for a dismissal of the lawsuit and a release of all claims which is reflected in our Consolidated Statement of Operations for the year ended December 29, 2023. In addition, we incurred incremental legal costs related to the settlement which were recorded as expenses in the period incurred.

Income Taxes. During 2024, we recorded $13.4 million of income tax expense related to certain federal, state and foreign taxes which reflected an effective tax rate of 31.1%. During 2023, we recorded $11.9 million of income tax expense related to certain federal, state and foreign taxes which reflected an effective tax rate of 25.8%. The increase in the effective tax rate is primarily due to the limitation of executive compensation deductions related to executive compensation, primarily driven by the stock price award program. See Note 10, “Stock Based Compensation,” to our consolidated financial statements included in this Annual Report on Form 10-K for more information.

Liquidity and Capital Resources

As of December 27, 2024 and December 29, 2023, we had $16.4 million and $21.0 million, respectively, of cash, and $12.7 million and $32.7 million, respectively, outstanding under our Credit Facility, net of deferred debt costs. We currently believe that available funds, including the cash on hand and funds available for borrowing under our Credit Facility, and cash flows generated by operations will be enough to fund our cash requirements, including working capital, debt payments, lease obligations and capital expenditures for at least the next twelve months and beyond. We may decide to raise additional funds in order to fund expansion, to develop new or further enhance products and services, to respond to competitive pressures, or to acquire complementary businesses or technologies. There is no assurance that additional financing would be available when needed or desired.

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

Cash Flows from Operating Activities

Net cash provided by operating activities was $47.7 million in 2024, as compared to $37.4 million in 2023. In 2024, the net cash provided by operating activities was primarily due to net income adjusted for non-cash items, partially offset by increases in accounts receivable and contract assets. In 2023, the net cash provided by operating activities was primarily due to net income adjusted for non-cash items, partially offset by increases in accounts receivable and contract assets and decreases in accrued liabilities, other accruals and income taxes payable.

Cash Flows from Investing Activities

Net cash used in investing activities was $10.6 million in 2024, as compared to $4.1 million in 2023. During the third quarter of 2024, the Company acquired LeewayHertz for $6.5 million, net of cash acquired. See Note 1 , “Basis of Presentation and General Information”, to our consolidated financial statements included in this Annual Report on Form 10-K for more information. During both periods, cash flows used in investing activities primarily related to investments for the development of our Hackett Connect Executive Advisory member platform and continued development of our QL benchmark, DTP technologies and our Gen AI platform, AI XPLR.

Cash Flows from Financing Activities

Net cash used in financing activities was $41.7 million in 2024, as compared to $42.6 million in 2023. The usage of cash in 2024, primarily related to the repayment of borrowings of $20.0 million related to our Credit Facility, dividend payments of $12.1 million, employee net vesting related tax withholding requirements of $4.1 million and the repurchase of $6.4 million of the Company's common stock. The usage of cash in 2023 was primarily related to the net pay down of our Credit Facility $27.0 million, dividend payments of $12.0 million and employee net vesting related tax withholding requirements of $3.8 million.

Material Cash Requirements

Debt Payments and Lease Obligations

On November 7, 2022, we amended and restated our credit agreement in order to extend the maturity date of our Credit Facility and provide the Company with an additional $55.0 million in borrowing capacity, for an aggregate amount of up to $100 million. See Note 8, “Credit Facility,” to our consolidated financial statements included in this Annual Report on Form 10-K for more information.

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As of December 27, 2024, we had $13.0 million of outstanding borrowings, excluding deferred debt costs, under our revolving line of credit, leaving us with borrowing capacity of approximately $87.0 million. See Note 8, “Credit Facility,” to our consolidated financial statements included in this Annual Report on Form 10-K for more information.

The following table summarizes our future principal payments under our future Credit Facility and lease commitments under our non-cancelable operating leases as of December 27, 2024 (in thousands):

(1) Excludes interest charges on borrowings, the fee on the amount of any unused commitment that we may be obligated to pay under our revolving Credit Facility as such amounts vary and the deferred debt costs. See Note 8, “Credit Facility”, to our consolidated financial statements included in this Annual Report on Form 10-K for more information

Capital Expenditures

As part of the LeewayHertz acquisition, the Company has committed to fund up to $10.0 million of development costs related to ZBrain AI subject to the business plans approved by the JV Board of Directors. Our capital expenditures primarily consist of investments related to the continued development of our Hackett Connect Executive Advisory member platform, our QL benchmark, Digital Transformation technologies and our Gen AI platform, AI XPLR. During the years ended December 27, 2024, and December 29, 2023, our capital expenditures were $4.1 million for both years. We expect an increase in capital expenditures related to the continued development of the ZBrain AI orchestration platform and the integration of AI XPLR.

Taxes

Cash paid for income taxes was $11.6 million and $13.3 million for the years ended December 27, 2024, and December 29, 2023, respectively. See Note 9, "Income Taxes," to our consolidated financial statements included in this Annual Report on Form 10-K for additional information.

Dividends and Share Repurchases

During the fiscal year 2024, our Board of Directors approved four quarterly dividends payments of $0.11 per share totaling $12.1 million. Subsequent to December 27, 2024, our Board of Directors approved a 9% increase in the dividend, increasing the annual dividend amount to $0.48 per share. We expect dividend payments in 2025 to be approximately $13.2 million.

We have an ongoing authorization from our Board of Directors to repurchase shares of our common stock. During 2024, we repurchased 43 thousand shares of common stock from members of our Board of Directors at an average price per share of $24.34, for a total cost of $1.1 million. In addition, we repurchased 182 thousand shares of common stock on the open market at an average price per share of $29.46, for a total cost of $5.4 million. As of December 27, 2024, we had $27.5 million share repurchase authorization remaining. Subsequent to fiscal year end, we repurchased 50 thousand shares of the Company’s common stock from our Chief Financial Officer and members of our Board of Directors for a total of $1.6 million, or $30.78 per share. Including these repurchases, we had approximately $26.0 million available for future repurchases 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 2024, 0.2 million shares were withheld and not issued for a cost of $4.1 million, bringing the total cumulative cash used to repurchase stock in 2024 to $10.5 million. In 2023, 0.2 million shares were withheld and not issued for a cost of $3.8 million, bringing the total cumulative cash used to repurchase stock in 2023 to $4.5 million.

Recently Issued Accounting Standards

For discussion of recently issued accounting standards, see Note 1, “Basis of Presentation and General Information”, to our consolidated financial statements included in this Annual Report on Form 10-K for more information.