HACKETT GROUP, INC. — Q3 2020 Form 10-Q
Business context and reporting period. The Hackett Group provides strategic advisory and technology consulting services, along with software and subscription offerings. This unaudited report covers the quarter and nine months ended September 25, 2020; comparisons are with periods ended September 27, 2019. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue before reimbursements | $57.8 | $66.8 | $175.6 | $197.1 |
| Operating income | $4.5 | $9.4 | $7.2 | $27.7 |
| Operating margin | 7.8% | 14.1% | 4.1% | 14.1% |
| Net income | $3.0 | $6.9 | $4.6 | $21.0 |
| Diluted earnings per share | $0.09 | $0.21 | $0.14 | $0.65 |
- Revenue before reimbursements declined 13% in the quarter and 11% for the nine-month period. Total revenue, including reimbursements, was $57.9 million and $180.2 million, respectively.
- Q3 revenue by group: Strategy and Business Transformation (S&BT) $22.2 million, down from $28.2 million; ERP, EPM and Analytics (EEA) $29.7 million, versus $30.1 million; International $5.8 million, versus $8.4 million. For the nine months, EEA grew to $92.2 million from $86.7 million, while S&BT and International declined.
- Cash from operating activities was $31.2 million for the first nine months, compared with $26.5 million. Capital expenditures were $1.5 million, yielding operating cash flow less capital expenditures of approximately $29.7 million. Operating cash flow benefited substantially from a $13.2 million decrease in receivables and contract assets.
- Cash was $43.2 million at September 25, 2020, up from $26.0 million at December 27, 2019. Current assets were $82.7 million and current liabilities $45.1 million. Total liabilities were $57.5 million and shareholders’ equity $138.6 million.
- No borrowings were outstanding under the $45 million revolving credit facility; the full capacity remained available. The facility maturity was extended to November 30, 2022. The company reported compliance with its covenants. There was no other debt balance identified in the filing.
- Cash used in financing was $12.5 million, including $8.9 million of dividends and $4.0 million of share repurchases. The company had $4.7 million of repurchase authorization remaining at quarter-end.
Material changes and management commentary
- Management attributed weaker revenue and diluted EPS in Q2 and Q3 to COVID-19 disruption, remote service delivery, and client uncertainty. It expected negative effects to continue until economic conditions improve; no quantified earnings or revenue guidance was provided.
- At the end of June, the company reduced its global workforce by approximately 10% and recorded $5.0 million of restructuring costs. Remaining restructuring liabilities were $1.2 million at quarter-end, including commitments associated with the 2020 and 2019 actions.
- Personnel costs fell, but increased as a share of revenue before reimbursements to 65% in Q3 from 62%, and to 67% for the nine months from 61%. SG&A decreased in dollars, primarily due to lower travel-related selling and marketing activity. Lower revenue and higher personnel costs as a percentage of revenue contributed to margin compression.
- Cash preservation measures included limiting hiring and contracted services, eliminating nonessential travel, and restricting discretionary spending. Management said available cash, borrowing capacity, and operating cash flows should cover working capital and capital expenditure needs for at least 12 months, while noting the pandemic’s eventual financial impact remained highly uncertain.
- COVID-19 risks include further client delays, cancellations, reduced demand, and collection difficulties. The allowance for doubtful accounts increased to $1.3 million from $0.7 million at year-end. The company also deferred $2.9 million of its employer Social Security taxes under the CARES Act and reported $0.5 million of deferred UK VAT payments.
- Q3 included a $0.2 million loss from discontinued operations related to a prior European business discontinuation. Management said ordinary-course legal matters were not expected to materially affect financial position, cash flows, or results.
Important facts for investors to verify
- Whether revenue and margins recover, particularly in S&BT and International, and whether continued COVID-19 disruption changes client demand or project timing.
- How much operating cash generation is sustained after the period’s significant receivables and contract-asset reductions.
- Future restructuring, credit-loss, or asset-impairment charges, and the timing of deferred payroll-tax and VAT payments.
- The sustainability of quarterly dividends and share repurchases given earnings declines and economic uncertainty.
- Ongoing compliance with credit-facility covenants and borrowing availability under the amended facility.