The Hackett Group, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 29, 2023. Unaudited results; amounts below are in U.S. dollars unless stated otherwise. Hackett is an IP-based strategic advisory and technology consulting firm, reporting three segments: Global S&BT, Oracle Solutions and SAP Solutions.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $75.9m | $72.0m | $224.2m | $223.6m |
| Operating income | $13.7m | $14.0m | $37.8m | $41.6m |
| Operating margin | 18.1% | 19.5% | 16.9% | 18.6% |
| Net income | $9.4m | $10.4m | $26.3m | $31.1m |
| Net margin | 12.4% | 14.4% | 11.7% | 13.9% |
| Diluted EPS | $0.34 | $0.32 | $0.95 | $0.97 |
| Operating cash flow | Not separately presented | Not separately presented | $11.8m | $34.1m |
Q3 revenue grew 5.3% year over year, while nine-month revenue was nearly flat. Nine-month revenue before reimbursements declined slightly, to $220.1m from $220.9m. Reimbursements are pass-through expenses without associated operating margin. For the nine-month period, operating cash flow fell substantially, with the filing citing higher receivables and contract assets, lower accrued liabilities and payments related to prior-year incentive compensation, vendors and income taxes.
Segments and material changes
- Global S&BT: Q3 revenue was $43.8m versus $41.6m; nine-month revenue was $129.8m versus $128.8m. Nine-month segment profit decreased to $40.9m from $45.9m, partly reflecting investment in program development and dedicated sales resources. Management cited slower growth and extended client decision-making in business transformation engagements.
- Oracle Solutions: Q3 revenue increased to $20.8m from $17.7m, with segment profit rising to $5.0m from $3.3m. Nine-month revenue was $58.8m versus $59.2m.
- SAP Solutions: Q3 revenue declined to $11.2m from $12.8m and segment profit to $2.9m from $3.8m, primarily due to lower SAP software sales. Nine-month revenue was approximately flat at $35.6m.
- SG&A increased 13% in Q3 and 10% over nine months, largely from investment in sales resources for IP-based offerings. The prior-year comparisons included restructuring and asset-impairment settlement reversals of $0.5m in Q3 and $0.7m over nine months, which benefited 2022 operating income.
Liquidity, debt and capital allocation
- Cash was $9.9m at September 29, 2023, down from $30.3m at December 30, 2022. Current assets were $75.3m and current liabilities $47.0m.
- Debt outstanding was $44.0m, excluding $0.3m of deferred debt costs, versus $60.0m at year-end 2022. The revolving facility provides up to $100m and matures November 7, 2027; approximately $56m remained available. The reported debt interest rate was 6.9%. The company was in compliance with its covenants.
- Nine-month financing cash outflow was $29.0m, including $16.0m net debt repayment, $9.0m in dividends and $4.4m in share repurchases. The annual dividend rate was $0.44 per share. Management said cash, available borrowing capacity and operating cash flow should meet working-capital needs, debt payments, leases and capital expenditures for at least the next 12 months.
Outlook, risks and contingencies
- The filing provides no specific financial guidance. Management warned that inflation, high interest rates, geopolitical events or weaker business confidence could reduce client demand; extended client decision-making was already affecting certain engagements.
- Other stated risks include client retention and acquisition, project timing and cancellations, recruiting and retaining skilled employees, collections, competition, margins, foreign exchange and access to financing.
- In May 2023, Gartner sued Hackett and two former Gartner employees hired by Hackett. On November 7, 2023, the court issued a preliminary injunction barring Hackett from employing the individuals in their current roles. No trial date had been set; Hackett said it could not reasonably estimate any loss and recorded no loss contingency.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. The filing said there were no material changes to the risk factors previously disclosed in the 2022 Form 10-K.
Investor verification priorities
- Track whether receivables and contract assets convert to cash; these balances rose to $62.2m from $48.4m at year-end, contributing to weaker operating cash flow.
- Review the Gartner injunction, subsequent litigation developments and any potential financial or operating effects.
- Monitor segment demand and profitability, particularly Global S&BT investment returns, Oracle momentum and SAP software sales.
- Confirm debt repayment, variable-rate interest exposure, available facility capacity and continued covenant compliance.
- Assess whether higher SG&A investment and ongoing dividends and repurchases remain supported by earnings and cash generation.