HACKETT GROUP, INC. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 28, 2019; comparisons are with the corresponding 2018 periods. Hackett provides strategic advisory and technology consulting, along with software and subscription services. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue before reimbursements | $68.0 | $68.7 | $130.3 | $134.7 |
| Total revenue, including reimbursements | $73.5 | $74.5 | $140.7 | $145.6 |
| Operating income | $9.8 | $14.2 | $18.3 | $22.5 |
| Operating margin on revenue before reimbursements | 14.4% | 20.7% | 14.1% | 16.7% |
| Net income | $7.0 | $11.5 | $14.1 | $18.9 |
| Diluted earnings per share | $0.22 | $0.36 | $0.44 | $0.59 |
| Operating cash flow | Not presented by quarter | $18.0 | $14.8 |
- Revenue and segments: Revenue before reimbursements declined 1.1% in Q2 and 3.3% in the first half. Q2 Strategy and Business Transformation (S&BT) revenue fell 5.6% to $35.7 million; ERP, EPM and Analytics Solutions (EEA) revenue rose 4.4% to $32.3 million. For the first half, S&BT decreased 5.4% and EEA decreased 0.7%.
- Margins and costs: Personnel costs before reimbursements were 60% of revenue before reimbursements in Q2 2019, versus 61% a year earlier. Management attributed lower personnel costs primarily to reduced subcontractor use and lower incentive-compensation accruals. SG&A was $15.2 million in Q2 and $29.2 million for the first half.
- Cash and liquidity: Cash was $16.7 million at June 28, 2019, up from $13.8 million at December 28, 2018. Operating cash flow was $18.0 million; investing outflow was $2.8 million and financing outflow was $12.4 million. Financing uses included $5.4 million of dividends, $5.4 million of share repurchases and $2.0 million of net revolver repayments.
- Debt and balance sheet: Revolver debt was $4.5 million, down from $6.5 million at year-end; approximately $40.5 million remained available under the $45 million facility. The interest rate was 3.9%, and the company reported compliance with its covenants. Operating lease liabilities totaled $7.6 million following adoption of the new lease standard. Total assets were $191.4 million and shareholders’ equity was $131.2 million.
Material changes and unusual items
- Q2 operating income declined to $9.8 million from $14.2 million. A key comparison item was acquisition-related contingent consideration: Q2 2018 included a $4.6 million benefit, while Q2 2019 recorded a $45,000 expense. The first-half 2019 period included a $1.0 million benefit, compared with a $4.6 million benefit in first-half 2018.
- Management said weaker-than-expected international revenue, particularly in S&BT, contributed to the decline; international client decisions appeared affected by Brexit uncertainty. International revenue represented 16% of revenue before reimbursements in both 2019 periods, versus 19% in Q2 2018 and 18% in the first half of 2018.
- Q2 income tax expense was $2.6 million, with a 27% effective tax rate, compared with $2.4 million and 17% in Q2 2018. First-half rates were 22% and 14%, respectively.
- The company exited its European REL Working Capital business at the end of fiscal 2018. Discontinued operations produced a $51,000 Q2 2019 loss and a $6,000 first-half loss.
- Operating lease accounting adoption added approximately $9.0 million of right-of-use assets and lease liabilities at transition; management said it did not materially affect earnings or cash flows.
Outlook, risks and contingencies
No specific earnings or revenue guidance is provided in the filing. Management believes cash, revolver availability and operating cash flows will be sufficient for working capital and capital expenditure needs for at least the next 12 months, while noting that additional financing may not be available if required. Risks highlighted include acquisition integration, retaining and winning clients, project timing and cancellations, hiring and retaining skilled employees, customer collection difficulties, competition and pricing pressure, foreign exchange, economic conditions, interest rates and access to financing. Management reported no material change to the risk factors in the 2018 Form 10-K. Ordinary-course legal matters were not expected by management to have a material adverse effect. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether S&BT and international demand stabilize, and whether Brexit-related uncertainty continues to affect client decisions.
- How much of the year-over-year operating income decline reflects recurring operating performance versus the prior-year contingent-consideration benefit.
- Trends in utilization, subcontractor costs, unbilled revenue and receivables, and the sustainability of operating cash flow.
- Revolver balance, covenant compliance, capital allocation through dividends and repurchases, and the remaining repurchase authorization.
- Potential changes in acquisition earnout estimates, discontinued-operation obligations and lease costs.