HACKETT GROUP, INC. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; comparable periods ended October 1, 2021. Amounts below are in U.S. dollars. The company provides strategic advisory and technology consulting services, alongside software and advisory subscriptions.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $72.0m | $71.9m | $223.6m | $208.6m |
| Operating income | $14.0m | $11.4m | $41.6m | $34.5m |
| Net income | $10.4m | $8.1m | $31.1m | $25.0m |
| Diluted EPS | $0.32 | $0.25 | $0.97 | $0.76 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $34.1m | $26.5m |
- Q3 total revenue was nearly flat year over year; revenue before reimbursements declined 0.6%. Nine-month revenue increased 7.2% (revenue before reimbursements increased 6.3%). Reimbursements have no associated operating margin.
- Operating margin was approximately 19.5% in Q3 versus 15.9% a year earlier, and 18.6% for the nine months versus 16.5%. Net margin was approximately 14.4% versus 11.3% for Q3, and 13.9% versus 12.0% for the nine months.
- Q3 operating income and net income rose despite almost unchanged revenue. Personnel costs before reimbursable expenses fell 5% in the quarter, chiefly from lower incentive accruals and subcontractor use. Nine-month costs rose 4%, mainly reflecting hiring and subcontractor use.
- Segments: Global S&BT revenue grew 12% in Q3 and 20% for the nine months. Oracle Solutions revenue declined 15% in Q3 but rose 6% year to date. SAP Solutions revenue declined 9% in Q3 and 22% year to date; the 2021 nine-month comparison included a $5.3m software sale. Global S&BT’s growth was attributed to continued demand for digital transformation; management cited extended client decision-making and reconsidered spending priorities in Oracle.
Financial position, cash flow and capital
- Cash was $67.0m at September 30, 2022, up from $45.8m at December 31, 2021. Current assets were $122.4m and current liabilities $51.9m; the current ratio was approximately 2.4.
- No revolving credit borrowings were outstanding at September 30. The then-existing facility provided up to $45m and matured November 30, 2022. On November 7, the company amended and restated it, extending maturity to November 7, 2027 and increasing capacity to $100m; no borrowings were outstanding upon amendment. The new facility is secured and contains financial covenants.
- Nine-month operating cash flow of $34.1m exceeded net income of $31.1m. Investing outflows were $3.2m, primarily for platform, benchmarking and digital-transformation technology development and equipment. Financing outflows were $9.6m, including $7.0m of dividends and $3.2m of share repurchases.
- Annual dividend was increased to $0.44 per share in Q1 2022. The board subsequently authorized an additional $120m for repurchases. On November 8, the company announced plans for a tender offer of up to $120m, to be funded with cash and facility borrowings. The tender-offer price bounds are internally inconsistent in the supplied filing text; verify the filed offer materials.
Outlook, risks and unusual items
- No specific forward financial guidance is provided. Management said cash, operating cash flow and available credit were expected to fund working capital and capital needs for at least the next 12 months and beyond.
- Management cautioned that weak or uncertain economic conditions could reduce client demand. Risks cited include COVID-19 impacts, project timing or cancellations, client collection difficulties, competition and pricing, talent retention, foreign-exchange movements, inflation, interest rates, and geopolitical developments including Russia’s conflict with Ukraine.
- The company reorganized reporting into three segments—Global S&BT, Oracle Solutions and SAP Solutions—in Q3 2022. It also reallocated goodwill to the new reporting units. Goodwill was $82.5m at September 30, down from $85.1m at year-end, mainly due to currency translation.
- Q3 included a $0.5m restructuring charge reversal, including lease-related items; the nine-month reversal was $0.7m. Remaining restructuring accrual was $0.1m.
- Control issue: Management concluded disclosure controls and internal control over financial reporting were not effective at September 30 due to a material weakness involving segment-reporting analysis and documentation under ASC 280. No material misstatement resulted. Remediation steps were underway, but the weakness was not yet considered fully remediated.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Investor verification priorities
- Review remediation progress and any subsequent updates on the material weakness and reporting controls.
- Confirm the tender-offer price range, terms, completion status and financing in the filed offer documents.
- Track segment trends, particularly the recovery or further deterioration in Oracle and SAP, and the sustainability of Global S&BT growth.
- Assess cash conversion and working-capital movements, including accrued liabilities, taxes payable and contract liabilities.
- Monitor use of the expanded credit facility, covenant compliance, and the effects of repurchases and dividends on liquidity.