Business context and reporting period
The Hackett Group, Inc. filed this unaudited Form 10-Q for the quarter ended March 29, 2019. The company provides strategic advisory and technology consulting services. Its reporting groups are Strategy and Business Transformation (S&BT) and ERP, EPM and Analytics Solutions (EEA).
Financial performance
Amounts are in millions of dollars except per-share data. Revenue before reimbursements is the company’s principal revenue measure; reimbursements are pass-through project expenses with no associated margin.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue before reimbursements | $62.4 | $66.0 | Down 5.6% |
| Total revenue, including reimbursements | $67.2 | $71.1 | Down 5.6% |
| Operating income | $8.6 | $8.3 | Up 3.7% |
| Operating margin on revenue before reimbursements | 13.8% | 12.5% | Up 1.3 percentage points |
| Income from continuing operations | $7.0 | $7.3 | Down 3.5% |
| Net income | $7.1 | $7.4 | Down 3.7% |
| Diluted earnings per share | $0.22 | $0.23 | Down $0.01 |
| Cash from operating activities | $6.8 | $17.2 | Down $10.4 |
Revenue before reimbursements declined in both groups: S&BT was $33.3 million, down 5.3%, and EEA was $29.1 million, down 5.8%. North American revenue before reimbursements was $52.5 million versus $53.5 million; international revenue was $9.8 million versus $12.5 million. Personnel costs before reimbursements were 62.4% of revenue before reimbursements, compared with 61.5% a year earlier. The filing does not provide a clear gross-margin figure.
Cash, liquidity and debt
Cash was $10.7 million at March 29, 2019, down from $13.8 million at December 28, 2018. Operating cash flow was $6.8 million; investing activities used $1.5 million and financing activities used $8.4 million. Financing outflows included $5.4 million in dividends and $4.0 million in share repurchases, partly offset by $1.0 million of new borrowing.
Revolver borrowings were $7.5 million at a 4.0% interest rate, with $37.5 million of the $45.0 million facility available. The company reported compliance with all credit covenants. Management believes cash, available borrowing capacity and operating cash flows will be sufficient for working capital and capital expenditures for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue declined 5.6%, reflecting lower international revenue, delayed starts for several consulting projects, and lower on-premise implementation revenue in EEA.
- Operating income and operating margin improved despite lower revenue. The quarter included a $1.1 million benefit from reducing the Jibe acquisition contingent-consideration liability.
- Net income declined despite improved operating income, in part because income tax expense rose to $1.4 million from $0.8 million; the effective tax rate was 17% versus 10%.
- Operating cash flow fell to $6.8 million from $17.2 million. The company cited increases in receivables and unbilled revenue and decreases in accounts payable and accrued liabilities as factors in 2019.
- The company exited its European REL Working Capital business at the end of fiscal 2018. Discontinued operations generated $45,000 of gain in Q1 2019, compared with $66,000 in Q1 2018.
Outlook, commentary and risks
The filing gives no specific revenue, earnings or margin guidance. Management attributed the revenue decline in part to year-end holiday timing and consulting projects scheduled for January that started late, as well as lower international revenue and reduced on-premise implementation revenue. It cautioned that quarterly results are not necessarily indicative of full-year or future results.
The company adopted the new lease standard effective December 29, 2018, recognizing operating lease right-of-use assets of $8.3 million and lease liabilities of $8.3 million at quarter-end; adoption did not materially affect reported income or cash flows. Quarterly lease expense was $0.7 million.
Risks identified include acquisition integration, client retention and new business, project timing and cancellations, hiring and retaining skilled employees, client collection difficulties, competition and pricing, foreign currency movements, economic conditions, interest rates and access to financing. The company reported no material changes to risk factors in its 2018 Form 10-K. Management stated that ordinary-course legal matters are not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
The annual dividend was increased to $0.36 per share, payable semi-annually. After quarter-end, the company declared a $0.18-per-share dividend for payment on July 10, 2019. It also repurchased 82,000 additional shares after quarter-end for $1.3 million. As of March 29, only $5.3 million remained under the repurchase authorization.
Most important facts for investors to verify
- Whether the lower revenue and delayed project starts were temporary, and how subsequent-quarter performance developed in both S&BT and EEA.
- Whether operating cash flow improved, given the substantial year-over-year decline and movements in receivables and accrued liabilities.
- The sustainability of operating margin improvement, including the effect of the nonrecurring $1.1 million Jibe earnout benefit.
- Future tax expense and effective tax rate, which increased year over year.
- Liquidity and capital allocation: cash levels, revolver usage and covenants, dividends, and remaining share-repurchase authorization.
- Progress and remaining costs or liabilities associated with the discontinued European REL business and acquisition earnouts.