HACKETT GROUP, INC. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 28, 2013; filed August 7, 2013. The company provides strategic advisory, benchmarking, business transformation, and technology consulting services. Amounts below are in millions except per-share data.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $59.0 | $58.0 | $113.3 | $112.0 |
| Revenue before reimbursements | $52.3 | $51.5 | $101.2 | $100.5 |
| Operating income | $5.1 | $4.5 | $8.6 | $8.5 |
| Operating margin on revenue before reimbursements | 9.7% | 8.7% | 8.5% | 8.4% |
| Net income | $2.9 | $3.8 | $4.9 | $7.4 |
| Diluted earnings per share | $0.09 | $0.12 | $0.15 | $0.21 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $5.2 | $6.3 |
- Q2 cost of service before reimbursements was 63.7% of revenue before reimbursements, up from 62.5%; SG&A was 26.6%, down from 28.8%. Reimbursements are matched by reimbursable costs.
- Cash and cash equivalents were $10.8 at June 28, down from $16.9 at December 28, 2012. Six-month investing cash use was $1.1, primarily for Hackett Performance Exchange development; financing cash use was $10.2, including $10.0 of term-loan repayments.
- Debt was $15.0, all long-term, with no revolver borrowings. The company had a $20.0 revolving facility available, subject to its credit agreement and covenants.
- Total assets were $143.7 and shareholders’ equity was $100.1 at period-end. Current assets were $53.6 versus current liabilities of $27.9.
Changes versus comparable periods
- Q2 total revenue rose 1.7%; six-month revenue rose 1.1%. The Hackett Group service revenue fell 5% in Q2 and 6% year to date, while ERP Solutions revenue rose 44% and 49%, respectively, mainly due to stronger SAP demand.
- Management attributed lower Hackett Group revenue mainly to weaker international revenue and slower-than-expected ramp-up of U.S. client engagements early in 2013.
- Operating income improved, but net income declined because income tax expense rose to $2.0 in Q2 and $3.4 for the half-year. Reported effective estimated rates were 41.0% and 40.6% in 2013, versus 9.6% and 6.5% in 2012; management cited prior releases of U.S. and foreign net-operating-loss valuation allowances.
- Operating cash flow decreased by $1.1 year over year, primarily due to timing of vendor and incentive-award payments, partly offset by improved receivable collections.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management said cash on hand, available revolver capacity, and operating cash flows should fund working capital and capital expenditures for at least the next 12 months; additional financing is not assured.
- On August 6, 2013, after quarter-end, the company announced its intent to commence a modified Dutch auction tender offer within 30 days for up to $35.8 in shares at $5.75–$6.50 per share. It intended to fund the offer with a new term-loan component of its credit facility; an amendment was expected but not yet completed.
- The company repurchased approximately 124,000 shares for $0.6 during the first half and had $5.0 remaining under its existing authorization at June 28. The board had increased the overall program authorization to $80.0.
- The company exited the Oracle ERP implementation business in the first quarter; the filing says the transaction was not material. Ordinary-course legal proceedings were not expected by management to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
- Key stated risks include client retention and acquisition, project timing and cancellations, recruiting and retaining skilled staff, collections, competition, pricing and margins, foreign exchange, economic conditions, interest rates, acquisition integration, and obtaining financing for the proposed tender offer.
Important facts for investors to verify
- Whether the proposed $35.8 tender offer proceeded, its final price and share count, and whether the credit-facility amendment and new borrowing were completed.
- Whether the SAP-related ERP Solutions growth can continue and whether the Hackett Group’s declining revenue and engagement ramp-up improve.
- The effect of the higher tax burden on future earnings and the remaining availability and usability of tax-loss carryforwards.
- Debt repayment terms, covenant headroom, variable-rate exposure, and liquidity after any tender offer; the facility requires leverage, fixed-cost coverage, and liquidity compliance.
- The company reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the period.