HACKETT GROUP, INC. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; comparisons are to the quarter and nine months ended October 2, 2015, unless otherwise noted. Financial statements are unaudited. The Hackett Group provides strategic advisory and technology consulting services, including benchmarking, business transformation, EPM and SAP ERP services.
Financial results
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $74.1m | $67.2m | $218.5m | $194.6m |
| Revenue before reimbursements | $66.8m | $60.0m | $197.0m | $174.3m |
| Operating income | $9.0m | $4.9m | $24.9m | $15.6m |
| Operating margin on revenue before reimbursements | 13.5% | 8.2% | 12.6% | 9.0% |
| Net income | $5.5m | $3.1m | $15.3m | $9.8m |
| Diluted GAAP EPS | $0.17 | $0.10 | $0.47 | $0.32 |
| Adjusted non-GAAP net income / diluted EPS | $8.0m / $0.25 | $6.4m / $0.20 | $22.3m / $0.68 | $16.9m / $0.55 |
| Adjusted non-GAAP gross margin | 39.2% | 39.6% | 38.6% | 39.0% |
| Operating cash flow | — | — | $20.8m | $19.2m |
Adjusted non-GAAP measures exclude specified stock compensation, intangible amortization and acquisition-related items and use a normalized 30% tax rate; they are not GAAP measures.
Liquidity, debt and capital allocation
- At September 30, cash was $14.4m, down from $23.5m at January 1. Current assets were $64.5m and current liabilities $48.9m.
- Debt carrying value was $12.6m, versus none at January 1. The company reported $13.0m outstanding on its revolving facility and approximately $32.0m of remaining capacity under a $45.0m revolver maturing May 2021. The facility is secured and subject to financial covenants; the company said it was compliant at quarter-end.
- Nine-month investing cash outflow was $2.1m, primarily capital expenditures. Financing cash outflow was $27.9m, including $30.1m of share repurchases, $3.9m of employee tax-related share withholding and $7.2m of dividends, partly offset by $13.0m net borrowings.
- The company repurchased about 2.1m shares under its plan during the nine months. This included approximately 1.5m shares bought from senior executives at $14.77 per share; management said the transaction was expected to reduce weighted-average shares by about 4% and add $0.03–$0.04 to annualized EPS. Remaining repurchase authorization was $4.4m.
- The annual dividend was increased to $0.26 per share. A further $0.13 semiannual dividend was declared after quarter-end, payable January 5, 2017.
Changes, outlook and risks
- Total revenue grew 10% in Q3 and 12% year to date. Management attributed performance to strong U.S. demand: North American service revenue increased 12% in Q3 and 16% year to date. ERP Solutions revenue rose 27% in Q3 and 12% year to date. International revenue was weaker year to date, declining 8% reported (6% in constant currency) for Hackett’s international business.
- Revenue growth and improved SG&A leverage accompanied higher operating income and net income. Adjusted non-GAAP gross margin was slightly lower year over year in Q3 and year to date. Personnel costs rose with hiring, lower-than-expected consultant turnover and greater subcontractor use. GAAP income tax expense was $3.4m in Q3 and $9.3m year to date; management cited higher taxable income and geographic mix.
- Management said operating cash flow and cash plus revolver availability should fund working capital and capital expenditure needs for at least the next 12 months. No specific earnings or revenue guidance is provided in the filing.
- Risks identified include retaining and winning clients, project timing and cancellations, attracting and retaining skilled employees, customer payment and collection risk, competition and pricing pressure, foreign-exchange movements, economic conditions, and access to financing. Management said ordinary-course legal matters were not expected to have a material adverse effect; no material risk-factor changes were reported.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting. The company is evaluating the effects of forthcoming accounting standards, including revenue recognition and lease guidance.
Key facts for investors to verify
- Whether strong U.S. demand and ERP Solutions growth continued, and whether international weakness persisted.
- How revenue growth translates into operating and gross margins, given increased personnel and subcontractor costs.
- Receivables and unbilled revenue rose to $47.9m from $42.0m at January 1; monitor collections and working-capital conversion.
- Debt, covenant compliance, variable-rate exposure and liquidity after substantial buybacks and dividends.
- The economics and governance of the executive share repurchase, including its stated EPS accretion, alongside remaining buyback capacity and diluted share count.