Business context and reporting period
The Hackett Group, Inc. is an IP-based strategic advisory and technology consulting firm, with revenue primarily from professional services and additional software and advisory offerings. This unaudited Form 10-Q covers the quarter ended March 30, 2018; comparisons are to the quarter ended March 31, 2017. Dollar figures below are in millions unless noted.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue before reimbursements | $67.5 | $65.1; up 4% |
| Total revenue, including reimbursements | $72.7 | $71.4 |
| Operating income / margin on revenue before reimbursements | $8.3 / 12.3% | $8.0 / 12.2% |
| Net income | $7.4 | $7.9 |
| Diluted earnings per share | $0.23 | $0.24 |
| Operating cash flow | $17.2 | $4.9 |
| Investing cash flow | $(2.4) | $(1.6) |
| Financing cash flow | $(8.6) | $(5.9) |
| Cash at quarter-end | $23.7 | $17.5 at Dec. 29, 2017 |
| Long-term debt | $19.0 | $19.0 at Dec. 29, 2017 |
Personnel costs before reimbursable expenses were 61.7% of revenue before reimbursements, unchanged year over year. SG&A excluding stock compensation, intangible amortization and acquisition costs was 22% of that revenue, also unchanged. Income tax expense was $0.8 million, with a 9.5% effective tax rate; the prior-year quarter had no income tax expense.
Current assets were $79.1 million and current liabilities $48.4 million at March 30, 2018. The $45 million revolving facility had $19 million drawn and $26 million available; the reported interest rate was 3.2%. The company said it was covenant-compliant and expected cash, operating cash flows and borrowing availability to cover working capital and capital expenditure needs for at least 12 months.
Material changes versus the prior period
- Revenue before reimbursements rose 4%. The Hackett Group segment grew 7% to $58.9 million; SAP Solutions fell 15% to $8.6 million.
- Management attributed Hackett domestic growth primarily to the 2017 Jibe acquisition, partly offset by lower Oracle on-premise-to-cloud migration work; international growth partly reflected the Aecus acquisition. SAP Solutions was affected by delayed project starts and loss of a significant application-managed-services contract.
- Net income declined to $7.4 million from $7.9 million, despite higher operating income, principally alongside higher interest expense and the new-period tax expense.
- Operating cash flow increased to $17.2 million from $4.9 million. Management cited lower payout of 2017 incentive compensation versus the prior-year payout and lower receivables/unbilled revenue; the year-over-year cash-flow improvement should not be viewed as solely earnings-driven.
- International revenue before reimbursements increased to $14.0 million from $12.0 million; it represented 19% of company revenue before reimbursements versus 18%. Reimbursements declined to $5.3 million from $6.4 million and carry no associated margin.
Outlook, risks and unusual items
The filing gives no specific revenue, earnings or margin guidance. Management stated that available funds and expected operating cash flows should be sufficient for at least the next 12 months, while noting that additional financing, if needed, may not be available when desired.
Key risks identified include acquisition integration and earnout outcomes; retaining clients and winning work; project timing and client cancellation; recruiting and retaining skilled employees; competition and pricing/margin pressure; customer collection difficulties; foreign-exchange and interest-rate movements; and access to debt financing. The company reported no material change to the risk factors in its 2017 Form 10-K. Management said ordinary-course legal matters were not expected to materially adversely affect financial position, cash flows or results.
Unusual or notable items include an Aecus acquisition-related compensation benefit tied to estimated earnout results; $2.7 million of non-cash stock compensation; and $0.6 million of intangible amortization. The company adopted ASC 606 effective December 31, 2017 using the modified retrospective method and reported no impact to the financial statements for the periods presented. It repurchased $1.0 million of shares under its plan and separately spent $3.0 million on employee net-vesting share obligations; it paid $4.7 million in dividends. Subsequent to quarter-end, the board declared a $0.17-per-share dividend and approved an additional $5 million share-repurchase authorization.
Important facts for investors to verify
- How much of the 4% revenue growth reflects acquisitions versus underlying demand, particularly in Hackett’s Oracle practices and international operations.
- Whether SAP Solutions can recover from delayed starts and the lost managed-services contract.
- Whether operating cash generation remains strong after the incentive-compensation payout comparison normalizes, and how receivables and unbilled revenue develop.
- Current utilization of the revolver, covenant headroom, variable-rate exposure and the cash requirements of dividends, repurchases and acquisition earnouts.
- Future tax expense and the impact of acquisition-related earnout estimates and stock-based compensation on reported earnings.