The Hackett Group, Inc. — Q2 2021 Form 10-Q
Business context and period. Hackett provides strategic advisory, benchmarking, business transformation and technology consulting, with additional software and advisory-program revenue. This unaudited report covers the quarter and six months ended July 2, 2021; comparisons are with the quarter and six months ended June 26, 2020. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue before reimbursements | $73.0m | $52.6m | $136.4m | $117.8m |
| Operating income (loss) | $14.2m | ($5.1m) | $23.1m | $2.6m |
| Operating margin, as reported | 19.5% | (9.6%) | 16.9% | 2.2% |
| Net income (loss) | $10.5m | ($3.9m) | $16.9m | $1.6m |
| Diluted EPS | $0.32 | ($0.13) | $0.51 | $0.05 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $19.7m | $21.1m |
- Revenue and mix: Reported revenue before reimbursements rose 39% in Q2 and 16% for the first half. Growth included a $5.3m software sale; excluding it, revenue was $67.7m for Q2 and $131.1m for the first half. Consulting revenue was $67.2m in Q2; software license sales were $5.8m.
- Segments: Q2 S&BT revenue was $26.4m versus $17.5m; EEA was $40.5m versus $30.7m, including the software sale; International was $6.0m versus $4.4m. For the first half, International revenue declined 3% year over year, with management citing extended client decision-making in Europe.
- Margins and costs: Personnel costs before reimbursements were 56.8% of revenue in Q2 versus 73.4% a year earlier, and 59.2% for the half versus 67.7%. SG&A was 19.7% of revenue in Q2 versus 21.7%; for the half, 19.6% versus 21.5%. Higher personnel costs reflected greater subcontractor use and incentive compensation; higher SG&A dollars reflected commissions and incentive accruals. Prior-year comparisons included $5.0m of Q2 and first-half restructuring costs.
- Cash, working capital and debt: Cash was $52.5m at July 2, up from $49.5m at January 1. Current assets were $102.3m and current liabilities $55.6m. Receivables and contract assets, net, increased to $47.2m from $32.8m, including unbilled contract assets of $17.7m versus $9.5m; the doubtful-account allowance rose to $1.29m from $0.61m. The company had no revolver borrowings and reported $45.0m of available capacity under its $45.0m facility, maturing November 30, 2022. It reported compliance with facility covenants. Operating lease liabilities totaled about $4.9m.
- Capital returns: First-half financing cash outflow was $15.2m, including $12.4m of share repurchases and $3.3m of dividends. The annual dividend was increased to $0.40 per share. At July 2, $13.6m remained under the repurchase authorization.
Changes, outlook and risks
- Performance improved substantially from the pandemic-affected 2020 comparison, including a return to operating and net profitability. Management attributed the improvement to stronger demand for enterprise transformation and growth in SAP, Oracle and OneStream implementation work, alongside the one-time software transaction.
- Management expected economic conditions to continue improving during the remainder of 2021, but gave no quantified revenue, earnings or cash-flow guidance in the provided filing text. Most employees continued to work remotely; headcount had increased from pandemic reductions, with some non-essential travel resuming.
- COVID-19 variants, renewed economic weakness, client demand and cancellations, collection difficulties, competition, staffing and retention, foreign exchange and access to financing were identified as risks. Management said renewed cost controls could be considered if business conditions deteriorated. Potential future impairment, credit-loss or restructuring charges depend on the severity and duration of the pandemic.
- The company recorded a $247,000 Q2 tax benefit from remeasuring deferred taxes following the UK’s enacted increase in corporate tax rates effective April 1, 2023. The $5.0m restructuring charge occurred in 2020; $950,000 of related commitments remained at July 2, 2021. A $3.9m office-related impairment was recorded in Q4 2020.
- Management stated ordinary-course litigation was not expected to materially adversely affect results, and reported no material changes to previously disclosed risk factors. Disclosure controls were judged effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How sustainable underlying revenue growth and margins are after excluding the $5.3m software sale, and whether demand remains strong across the consulting practices.
- Whether the sharp increase in receivables and unbilled contract assets converts to cash, and whether the higher doubtful-account allowance proves adequate.
- Cash-flow trends, including the effect of working capital, repurchases and dividends on liquidity; confirm ongoing revolver availability and covenant compliance.
- Potential dilution and capital allocation: 2.9m stock appreciation rights had a $4.00 exercise price and February 8, 2022 expiration; confirm subsequent exercises, repurchases and dividend declarations.
- Developments in COVID-19-related client demand, European decision times, staffing costs, lease commitments and any resulting impairment or restructuring charges.