Business context and reporting period
The Hackett Group, Inc. (NASDAQ: HCKT) filed this unaudited Form 10-Q for the quarter and nine months ended September 27, 2019. It provides advisory, benchmarking, business transformation and technology consulting services, along with software-related offerings. Unless stated otherwise, amounts below are U.S. dollars in millions; comparisons are with the corresponding 2018 periods.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue before reimbursements | $66.8 | $68.2 | $197.1 | $202.9 |
| Total revenue, including reimbursements | $72.7 | $73.7 | $213.4 | $219.4 |
| Operating income | $9.4 | $8.3 | $27.7 | $30.8 |
| Operating margin on revenue before reimbursements | 14.1% | 12.1% | 14.1% | 15.2% |
| Income from continuing operations | $6.9 | $5.7 | $21.0 | $24.6 |
| Net income | $6.9 | $5.2 | $21.0 | $24.0 |
| Diluted earnings per share | $0.21 | $0.16 | $0.65 | $0.75 |
- Q3 revenue before reimbursements declined 2.1%; nine-month revenue declined 2.9%. Net income increased 34% in Q3 but decreased 13% for the nine-month period.
- Operating income improved in Q3 despite lower revenue, while the nine-month operating margin narrowed. Q3 included a $0.1 million benefit from the change in acquisition-related contingent consideration versus $0.8 million expense in Q3 2018; the nine-month figures include benefits of $1.1 million and $3.8 million, respectively.
- Operating cash flow was $26.5 million for the nine months, compared with $24.4 million a year earlier. Capital spending was $3.7 million versus $7.3 million. Financing used $20.3 million, primarily for $11.2 million of dividends, $5.5 million of share repurchases and $4.0 million of net debt repayment.
- Cash was $16.4 million at September 27, up from $13.8 million at December 28, 2018. Current assets were $78.0 million and current liabilities $39.4 million. Receivables and contract assets, net, totaled $57.9 million.
- Debt was $2.5 million at quarter-end, with approximately $42.5 million of revolver capacity remaining; the company subsequently repaid the balance in full. The company reported compliance with credit-facility covenants.
- Dividends paid during the first nine months totaled $11.2 million. The company declared a further $0.18-per-share dividend after quarter-end, payable January 7, 2020. It repurchased no shares under its repurchase plan during Q3; $3.9 million of authorization remained at quarter-end.
Material changes versus the prior comparable period
- Q3 U.S. Strategy and Business Transformation revenue rose 5.5% to $27.4 million, and U.S. ERP, EPM and Analytics revenue rose 3.2% to $30.9 million. International revenue fell 31.1% to $8.4 million.
- For the first nine months, Strategy and Business Transformation revenue increased 2.2% to $78.6 million; ERP, EPM and Analytics revenue was nearly flat at $89.0 million; International revenue declined 20.2% to $29.4 million.
- Management attributed international weakness mainly to Brexit-related uncertainty affecting client decisions and the loss of a significant European engagement after the client was acquired. International revenue was 13% of Q3 revenue before reimbursements, down from 18% a year earlier.
- SG&A costs were lower in Q3 and for the nine-month period. Nine-month personnel costs also declined, though personnel costs as a share of revenue before reimbursements rose to 61.3% from 60.9%.
- Cash increased, while long-term debt fell from $6.5 million at December 28, 2018 to $2.5 million at quarter-end. Adoption of the new lease standard added $8.3 million of right-of-use assets and $8.3 million of operating lease liabilities at quarter-end; the company reported approximately $9.0 million of lease assets and liabilities on adoption.
Outlook, commentary, risks and unusual items
- The filing provides no quantified revenue or earnings guidance. Management said cash, operating cash flows and available revolver capacity were expected to fund working capital and capital expenditures for at least the next 12 months.
- After quarter-end, the company expected approximately $2.5 million of restructuring costs, primarily employee severance in Europe and Australia, following continued demand declines in those markets. The actions were intended to align costs with anticipated demand.
- Management identified risks including retaining and winning clients, project timing and cancellations, competition and pricing, recruiting and retaining skilled staff, customer collection difficulties, foreign-exchange movements, Brexit, economic conditions and access to debt financing.
- The European REL Working Capital business was exited at the end of fiscal 2018 as demand and its engagement pipeline weakened. Discontinued operations were not material in Q3 2019.
- Ordinary-course legal proceedings were disclosed; management did not expect their resolution to materially adversely affect financial position, cash flows or results. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether international demand, particularly in Europe and Australia, stabilizes and whether Brexit uncertainty continues to delay client decisions.
- The timing and actual cost of the announced restructuring, and whether it produces savings consistent with reduced expected demand.
- Whether U.S. practice growth can offset international weakness and sustain operating margins.
- Receivables and contract-asset collection trends, operating cash conversion, and continued capacity to fund dividends and repurchases.
- Post-quarter debt repayment, revolver availability and covenant compliance, as well as the effect of lease obligations on ongoing liquidity.
- Acquisition earnout settlements and the impact of related contingent-consideration adjustments on reported earnings.