HACKETT GROUP, INC. quarterly report, Q1 FY2016

Business context and reporting period

The Hackett Group, Inc. is a strategic advisory and technology consulting firm, including The Hackett Group and ERP Solutions service groups. This unaudited Form 10-Q covers the quarter ended April 1, 2016; comparisons are with the quarter ended April 3, 2015. Financial statement amounts below are in millions of dollars unless otherwise noted.

Financial performance and liquidity

• Total revenue rose 13% year over year; revenue before reimbursements increased about 13%. The filing attributes growth to stronger U.S. demand.
• GAAP income tax expense was $2.8 million, a 39% effective rate, versus $1.5 million and 33% a year earlier. Management cited the geographic mix of taxable earnings. Adjusted non-GAAP results use a 30% normalized tax rate.
• Operating cash flow improved but remained modest relative to net income. Increased receivables and unbilled revenue and the payout of prior-year incentive compensation weighed on cash generation.
• Investing cash outflow was $0.5 million, primarily for capital expenditures on benchmark technology. Financing cash outflow was $10.9 million, including $3.2 million of dividends and $7.7 million of share purchases, including employee net-vesting share withholding.
• Cash was $12.6 million at April 1, down from $23.5 million at January 1. Current assets were $62.1 million and current liabilities $43.1 million. No credit-facility borrowings were outstanding at quarter-end; approximately $20 million of revolver capacity was available then.
• On May 9, 2016, after quarter-end, the company amended its credit agreement, increasing revolving capacity to $45 million and extending maturity to May 9, 2021. The facility is secured and subject to financial covenants.

Material changes and unusual items

• The Hackett Group service-group revenue rose 12% to $57.9 million; ERP Solutions revenue rose about 16% to $10.8 million. Management reported Hackett U.S. growth of 21%, offsetting a 19% decline in international revenue, primarily Europe. International revenue was 13% of total, versus 18% a year earlier.
• Personnel costs before reimbursements increased 14%, reflecting higher headcount, subcontractor costs and incentive compensation. Adjusted non-GAAP personnel costs were 62% of revenue before reimbursements versus 61%; adjusted SG&A declined to $14.2 million from $14.3 million, or 23% of revenue before reimbursements versus 26%.
• One customer accounted for more than 5% of revenue in Q1 2016; none did in Q1 2015. The filing does not identify the customer.
• After quarter-end, the board approved a repurchase of approximately 1.5 million shares from the CEO, COO and CFO at $14.77 per share, for approximately $22.2 million. The company said it would fund the transaction with credit-facility borrowings and estimated the share reduction would be about 4% and annualized EPS accretion $0.03–$0.04. The filing also reports a $0.13 semiannual dividend declared after quarter-end, following an increase in the annual dividend rate to $0.26 per share.
• Foreign-currency translation reduced comprehensive income by $0.7 million in Q1 2016, versus a $1.3 million reduction a year earlier; management said currency effects on quarterly revenue were not material.

Outlook, risks and controls

The filing gives no specific revenue or earnings guidance. Management said available cash, operating cash flows and revolver capacity were expected to cover working capital and capital expenditure needs for at least the next 12 months, while noting that additional financing might be sought for growth or acquisitions and could not be assured. Identified risks include retaining and winning clients, project timing and cancellations, attracting skilled employees, customer collection difficulties, competition, pricing and margins, foreign-exchange movements, economic conditions and access to financing. Management reported no material change to the risks in the prior annual report, no material adverse expected effect from ordinary-course litigation, and effective disclosure controls as of period-end.

Important facts for investors to verify

• Whether U.S. growth and the reported weakness in international, particularly European, revenue persisted after Q1.
• Subsequent borrowing, covenant headroom and liquidity following the approximately $22.2 million insider share repurchase.
• Cash conversion and working-capital trends, especially receivables, unbilled revenue and accrued compensation.
• The effect of increased share-based compensation and potential dilution on per-share results.
• The identity and revenue contribution of the customer exceeding 5% of quarterly revenue, and any resulting concentration risk.