HACKETT GROUP, INC. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 26, 2014. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. Hackett provides strategic advisory, business and technology consulting, and ERP services.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $60.4 | $57.9 | $176.4 | $171.2 |
| Revenue before reimbursements | $54.6 | $52.0 | $159.0 | $153.2 |
| Operating income | $5.1 | $4.7 | $8.4 | $13.3 |
| Net income | $3.6 | $2.6 | $5.0 | $7.5 |
| Diluted EPS | $0.12 | $0.08 | $0.17 | $0.23 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(1.5) | $9.0 |
- Q3 revenue increased about 4%; nine-month revenue increased about 3%. Q3 operating margin was 9.3% of revenue before reimbursements, versus 9.0%; the comparable nine-month margin fell to 5.3% from 8.7%.
- Management reported gross margins for Hackett Group services of 35% in Q3 and 32% for the nine-month period; ERP Solutions gross margins were 38% and 42%, respectively.
- At September 26, cash and cash equivalents were $10.6 million, down from $18.2 million at December 27, 2013. Current assets were $60.2 million and current liabilities $43.7 million.
- Total debt was $27.0 million: $4.6 million current and $22.4 million long term. The credit facility had $2.5 million drawn on the revolver and $17.5 million of remaining revolver availability; the term loan had $24.5 million outstanding. Facility maturity is August 27, 2018.
- Accounts receivable and unbilled revenue, net, rose to $44.4 million from $34.0 million at year-end. Nine-month operating cash use was attributed primarily to higher receivable and unbilled balances.
Changes versus prior comparable periods
- Q3 net income rose to $3.6 million from $2.6 million, while nine-month net income declined to $5.0 million from $7.5 million. The nine-month comparison includes $3.6 million of restructuring costs in 2014, versus none in 2013.
- Q3 Hackett Group segment revenue increased to $51.4 million from $48.7 million; ERP Solutions revenue decreased to $9.1 million from $9.2 million. For nine months, Hackett Group revenue increased to $146.7 million from $140.0 million, while ERP Solutions declined to $29.7 million from $31.3 million.
- SG&A rose to $15.4 million in Q3 and $45.3 million for nine months, versus $13.3 million and $40.5 million. Management cited Technolab acquisition costs and higher selling expense and incentive compensation.
- Nine-month operating cash flow moved from $9.0 million provided to $1.5 million used. Investing cash use increased to $4.3 million, including the Technolab acquisition and laptop replacement. Financing cash use was $1.9 million, including $10.3 million in share repurchases, partly offset by net borrowings.
Outlook, risks and unusual items
- Management said available cash, $17.5 million of revolver availability and expected operating cash flows should cover working capital and capital expenditure needs for at least the next 12 months. No specific earnings or revenue guidance was provided.
- Technolab’s U.S., Canadian and Uruguayan operations were acquired in Q1 2014 for $2.9 million cash and $1.0 million in shares. Sellers may earn up to $8.0 million in contingent consideration, subject to results. The preliminary allocation included $7.6 million of goodwill and $4.1 million of definite-lived intangible assets.
- Management recorded $3.6 million of restructuring costs, primarily for reductions in European consultants and support staff, in response to continued weakness in European demand. A $0.75 million restructuring accrual remained at period-end.
- Risks highlighted include acquisition integration and contingent consideration, demand and project timing, client retention and collections, competition and margin pressure, recruiting and retaining skilled staff, foreign exchange, and variable-rate borrowing. A 100-basis-point interest-rate increase was not expected to have had a material effect on reported-period results.
- Management said ordinary-course litigation was not expected to have a material adverse effect; it reported no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
- The company repurchased approximately 485,000 shares for $3.0 million in Q3 and 1.7 million shares for $10.3 million year to date. Approximately $4.3 million remained under the repurchase authorization at quarter-end.
Important facts for investors to verify
- Whether the substantial increase in receivables and unbilled revenue converts to cash, and how collections affect future operating cash flow.
- Progress in stabilizing European demand and the effects of restructuring on costs, utilization and margins.
- Technolab integration, the assumptions behind its preliminary purchase accounting, and whether earn-out payments are triggered.
- Compliance with credit-facility leverage, fixed-cost coverage and liquidity covenants, alongside debt service and continued repurchases.
- Performance of ERP Solutions amid the SAP sales-channel transition, and adoption of the new revenue-recognition standard effective for the company in periods beginning on or after December 15, 2016.