HACKETT GROUP, INC. quarterly report, Q1 FY2015

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Business context and reporting period

The Hackett Group, Inc. is a strategic advisory and technology consulting firm. This unaudited Form 10-Q covers the quarter ended April 3, 2015; comparisons are with the quarter ended March 28, 2014. Amounts below are in U.S. dollars.

Financial performance and position

  • Revenue: Total revenue was $61.0 million, up 11% year over year (14% at constant currency). Revenue before reimbursements was $54.9 million, up from $49.4 million. The Hackett Group segment generated $51.6 million; ERP Solutions generated $9.4 million.
  • Profit: Operating income was $4.6 million versus $0.4 million; net income was $3.0 million versus $0.4 million. Diluted EPS was $0.10 versus $0.01. The company reported adjusted non-GAAP net income of $4.8 million and adjusted diluted EPS of $0.16, compared with $2.3 million and $0.08.
  • Margins: Adjusted non-GAAP gross margin was 38.7% of revenue before reimbursements, compared with 34.0%. Personnel costs before reimbursable expenses fell to 61% of revenue before reimbursements from 66%; SG&A was 26% in both periods.
  • Cash flow: Operating cash use was $2.4 million, improved from $8.0 million used. Investing cash use was $0.7 million; financing cash use was $0.7 million, principally share repurchases. Cash declined $3.8 million during the quarter to $10.8 million.
  • Debt and liquidity: Debt totaled $18.3 million, including $1.7 million current and $16.6 million long-term; the revolving facility had no amount drawn, with $20.0 million in borrowing capacity. Current assets were $57.8 million and current liabilities $38.4 million. Management said cash, revolver availability and operating cash flows should cover working capital and capital expenditure needs for at least 12 months.
  • Other balance-sheet metrics: Total assets were $152.3 million. Accounts receivable and unbilled revenue, net, rose to $42.2 million from $37.4 million.

Material changes versus the prior period

  • Revenue growth reflected increases across the business: U.S. Hackett Group revenue rose 12%, international Hackett Group revenue rose 10%, and ERP Solutions revenue rose 7%. International revenue was 18% of total revenue in both periods; no customer represented more than 5% of revenue.
  • Higher revenue and stronger margins, including improved margins in application maintenance and support services, contributed to improved operating results. Personnel costs rose 3%, primarily due to higher incentive compensation; SG&A increased from $12.9 million to $14.3 million, primarily reflecting selling expenses and incentive compensation.
  • The comparison is affected by prior-year unusual items: 2014 included a $3.0 million bargain purchase gain and $3.6 million of restructuring costs, as well as acquisition-related compensation. No such bargain purchase gain or restructuring expense was recorded in 2015.
  • Operating cash use improved year over year, but 2015 operating cash flow remained negative. The filing attributes cash use mainly to compensation and maintenance-payment timing and higher receivables and unbilled balances.

Outlook, risks and other notable items

  • The filing provides no specific revenue, earnings or margin guidance. Management cautions that first-quarter results are not necessarily indicative of full-year or future results.
  • Management cited risks including client retention and new-business generation, project timing and cancellations, competition and pricing, ability to attract and retain skilled staff, collection risk, economic conditions, foreign-exchange movements, and access to additional financing.
  • Debt bears variable interest rates; the company stated that a 100-basis-point increase would not have had a material effect on quarterly results. Foreign-currency exposure is primarily to the British pound, euro and Australian dollar.
  • The company repurchased approximately 75,000 shares for $0.7 million at an average $8.70 per share; approximately $3.0 million remained authorized. It reported $0.2 million of remaining restructuring commitments, primarily European severance costs.
  • Management reported effective disclosure controls and no material changes in internal control over financial reporting. It said ordinary-course legal matters were not expected to have a material adverse effect; no material changes to previously disclosed risk factors were reported.
  • The company was evaluating the effect and transition method for the new revenue-recognition standard, which it said would apply for annual and interim periods beginning on or after December 15, 2016.

Important facts for investors to verify

  1. Whether revenue growth and improved margins persist, particularly in international markets and application maintenance and support services, including after foreign-exchange effects.
  2. Whether receivables and unbilled revenue convert to cash and operating cash flow turns positive.
  3. Debt amortization, covenant compliance, variable-rate exposure and continued availability of the undrawn revolver.
  4. The nature and comparability of adjusted non-GAAP measures and the adjustments used, especially given the prior-year acquisition gain and restructuring charge.
  5. Potential effects of foreign-currency movements, client project timing or cancellations, and the revenue-recognition standard.