HACKETT GROUP, INC. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 26, 2020. Financial statements are unaudited. Hackett provides strategic advisory, business transformation and technology consulting services, alongside software and subscription offerings.
Financial performance
Amounts below are in millions of dollars except per-share data. Revenue before reimbursements is the company’s principal net revenue measure; reimbursements are pass-through expenses.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue before reimbursements | $52.6 | $68.0 | $117.8 | $130.3 |
| Total revenue, including reimbursements | $52.8 | $73.5 | $122.3 | $140.7 |
| Operating income (loss) | $(5.1) | $9.8 | $2.6 | $18.3 |
| Operating margin on revenue before reimbursements | (9.6%) | 14.4% | 2.2% | 14.1% |
| Net income (loss) | $(3.9) | $7.0 | $1.6 | $14.1 |
| Diluted EPS | $(0.13) | $0.22 | $0.05 | $0.44 |
| Operating cash flow | Not separately provided | Not separately provided | $21.1 | $18.0 |
- Q2 revenue before reimbursements fell 23% year over year; first-half revenue declined 10%. Consulting revenue was $51.0 million in Q2 and $114.3 million for the first half. Software license sales were $1.7 million and $3.5 million, respectively.
- Q2 group revenue: Strategy and Business Transformation (S&BT) $16.8 million, down from $26.3 million; ERP, EPM and Analytics Solutions (EEA) $31.4 million, up from $31.0 million; International $4.4 million, down from $10.7 million. First-half group revenue was $41.3 million, $64.6 million and $11.9 million, respectively.
- Q2 personnel costs before reimbursements were 73% of revenue before reimbursements, versus 60% a year earlier; first-half ratio was 68%, versus 61%. SG&A was 22% of revenue before reimbursements in both comparable quarters and periods.
Balance sheet, cash flow and capital
- At June 26, cash was $37.4 million, versus $26.0 million at December 27, 2019. Current assets were $78.1 million and current liabilities $42.3 million. Accounts receivable and unbilled revenue, net, declined to $37.0 million from $49.8 million.
- Six-month cash flow: operating activities provided $21.1 million; investing used $1.3 million, including investment in Quantum Leap benchmark technology; financing used $8.4 million. Cash increased $11.4 million.
- The company had no borrowings under its $45 million revolving credit facility, leaving approximately $45 million available. The facility maturity was extended to November 30, 2022; the company reported compliance with all covenants. Total liabilities were $55.9 million, including $8.8 million of operating lease liabilities.
- Six-month financing outflows included $5.8 million of dividends and $3.0 million of share repurchases, including employee net-vesting repurchases. No shares were repurchased under the board-approved repurchase plan during Q2. A $3.1 million quarterly dividend was paid in July.
Changes, outlook and risks
- COVID-19 disrupted client demand, travel and service delivery. Management said the pandemic negatively affected Q2 net revenue and diluted EPS and expected adverse effects to continue until economic conditions improve. The duration and financial impact remained highly uncertain; no quantitative earnings or revenue guidance was provided.
- At the end of June, Hackett reduced its global workforce by approximately 10% and recorded $5.0 million in restructuring costs, primarily for U.S. and European staff reductions. Remaining restructuring commitments were $3.2 million at quarter-end. Management said further cost actions, impairment charges, higher doubtful-account allowances or restructuring could depend on the pandemic’s severity and duration.
- Management also cited longer client decision-making, possible delayed or cancelled work, clients’ ability to pay, and sensitivity to economic conditions as key risks. One customer represented 6% of Q2 revenue and 5% of first-half revenue; no customer exceeded 5% in the comparable 2019 periods.
- Cash preservation measures included restricting hiring and contracted services, limiting discretionary spending, and eliminating travel except where needed for customers. Management believed cash, available borrowing capacity and operating cash flows would cover working capital and capital expenditure needs for at least 12 months.
- The company deferred $1.8 million of employer Social Security taxes under the CARES Act and $0.8 million of U.K. VAT payments. Ordinary-course legal matters were not expected by management to have a material adverse effect. Management concluded disclosure controls were effective at quarter-end.
Important facts for investors to verify
- Whether demand, project timing and client collections recover, particularly in S&BT and international markets, and whether EEA growth continues.
- Whether workforce reductions and other cost measures offset lower revenue without impairing delivery capacity or growth.
- Cash-flow sustainability: first-half operating cash flow benefited from a $13.2 million decrease in receivables and unbilled revenue; review working-capital movements and deferred tax payments.
- Future capital returns and liquidity: monitor dividend declarations, repurchases, credit-facility availability and covenant compliance.
- Potential additional restructuring, credit-loss allowances or asset impairments as pandemic conditions evolve.