HACKETT GROUP, INC. — Q3 2021 Form 10-Q
Business context and period. Hackett is an IP-based strategic advisory and technology consulting firm, with revenue primarily from professional services and also from software, support, maintenance, and advisory subscriptions. This unaudited report covers the quarter and nine months ended October 1, 2021; comparisons are with periods ended September 25, 2020. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue before reimbursements | $71.4 | $57.8 | $207.8 | $175.6 |
| Operating income | $11.4 | $4.5 | $34.5 | $7.2 |
| Net income | $8.1 | $3.0 | $25.0 | $4.6 |
| Diluted EPS | $0.25 | $0.09 | $0.76 | $0.14 |
| Operating margin on revenue before reimbursements | 16.0% | 7.8% | 16.6% | 4.1% |
| Operating cash flow | Not separately presented | Not separately presented | $26.5 | $31.2 |
Q3 revenue before reimbursements rose 24% year over year; nine-month revenue rose 18%. Nine-month growth included a $5.3 million software sale recorded in Q2; excluding it, revenue was $202.5 million. Q3 and nine-month net income rose substantially, while operating cash flow declined year over year, largely reflecting increased receivables and contract assets.
Revenue mix and costs. Q3 revenue before reimbursements comprised $27.6 million from Strategy and Business Transformation, $38.2 million from ERP, EPM and Analytics Solutions, and $5.6 million from International. S&BT and EEA benefited from improved demand and growth across practices; International revenue declined 5% in both the quarter and nine-month period. Personnel costs before reimbursable expenses were 61% of revenue in Q3 and 60% year to date, versus 65% and 67% in the comparable 2020 periods. SG&A was 19% of revenue in both 2021 periods, down from 22% in 2020.
Balance sheet and liquidity. At October 1, cash was $52.9 million, current assets $105.7 million, current liabilities $54.9 million, and total assets $211.4 million. The company had no borrowings against its $45 million revolving credit facility, which matures November 30, 2022, and was in compliance with covenants. Management said cash, operating cash flows, and available borrowing capacity should cover working capital and capital expenditure needs for at least the next 12 months. The filing reports no material interest-rate impact from a 100-basis-point increase in revolver rates.
For the first nine months, investing cash outflow was $2.3 million, mainly for Quantum Leap benchmark technology development. Financing cash outflow was $20.7 million, including $14.6 million for share repurchases and $6.5 million for dividends. Capital expenditures were not separately identified in the summarized cash-flow discussion. Interest expense was $0.08 million for the nine months. No material debt balance was outstanding.
Changes, outlook, risks, and unusual items
- Compared with 2020, revenue and profitability recovered as demand improved after COVID-19 disruption. The 2020 comparison included $5.0 million of restructuring costs in the first nine months; there were none in the 2021 period.
- Management provided no specific revenue or earnings guidance. It said 2021 improvement reflected better economic conditions, but warned that renewed COVID-19 disruption, variants, or economic weakness could reduce client demand. Most employees continued to work remotely; staffing and some travel had resumed.
- In Q4 2021, the company expected to pay approximately $21–$23 million in cash for employee withholding taxes tied to anticipated net settlement of stock appreciation rights expiring in February 2022. It anticipated issuing about 1.5 million shares; cash and share amounts depend on exercise timing and share price. About 2.9 million SARs were outstanding at October 1, with a $4.00 exercise price.
- The company repurchased 738,000 shares under its plan for $12.8 million during the first nine months and had $11.5 million of authorization remaining. It declared a fourth 2021 quarterly dividend after quarter-end.
- Accounts receivable and contract assets, net, rose to $49.6 million from $32.8 million at year-end, including a higher doubtful-account allowance ($1.9 million versus $0.6 million). Contract liabilities increased to $12.0 million from $8.8 million. The remaining restructuring liability was $0.8 million.
- Management identified risks including COVID-19 and macroeconomic uncertainty, client retention and project cancellations, attracting and retaining skilled employees, competition and margins, foreign exchange, and access to financing. Ordinary-course legal matters were not expected by management to have a material adverse effect. No material risk-factor changes were reported; disclosure controls were deemed effective.
Important facts for investors to verify
- Whether revenue momentum persists, particularly in S&BT and EEA, and how results trend excluding the $5.3 million software transaction.
- Receivables, contract assets, collections, and allowance adequacy given their increase and the related operating-cash-flow decline.
- Actual SAR exercise, Q4 withholding-tax cash payment, shares issued or withheld, and subsequent diluted share count.
- Cash returned through repurchases and dividends relative to liquidity needs, including the revolving facility’s 2022 maturity and covenant requirements.
- Potential effects of renewed COVID-19 disruption, economic uncertainty, staffing constraints, and international weakness on demand and margins.