Hackett Group, Inc. — Q1 2014 Form 10-Q
Reporting period: Quarter ended March 28, 2014; comparisons are with the quarter ended March 29, 2013. Hackett provides strategic advisory and technology consulting, including benchmarking, business transformation, EPM and ERP services. Amounts below are in U.S. dollars.
Financial performance
- Revenue: $54.9 million, up 1% year over year. Revenue before reimbursements was $49.4 million, also up modestly.
- Revenue mix: The Hackett Group segment increased to $46.1 million from $43.6 million; ERP Solutions declined to $8.8 million from $10.7 million. North America revenue rose to $46.4 million from $42.3 million, while international revenue fell to $8.5 million from $12.0 million.
- Profitability: Operating loss was $1.7 million versus operating income of $3.5 million. Net loss was $2.0 million, or $0.07 per diluted share, versus net income of $2.0 million, or $0.06 per diluted share.
- Margins and costs: Cost of service before reimbursements increased to 67% of revenue before reimbursements from 66%; SG&A increased to 29% from 27%. The quarter included $3.6 million of restructuring expense; excluding reimbursements, operating margin was negative 3.4%, compared with positive 7.2% a year earlier.
- Cash flow: Operating cash use was $8.0 million, compared with $0.5 million. Investing cash use was $2.9 million, including the Technolab acquisition; financing provided $5.4 million. Cash declined $5.5 million to $12.7 million.
- Liquidity and debt: Current assets were $55.9 million and current liabilities $41.4 million. Debt totaled $28.7 million ($2.4 million current and $26.3 million long-term), versus $19.0 million at December 27, 2013. The company reported $15.5 million of remaining revolver availability and $0.7 million of restricted cash.
Changes, outlook and risks
- Management attributed stronger U.S. Hackett Group revenue to demand in Business Transformation and EPM, offset by a 29% decline in international revenue. ERP Solutions revenue fell 18%, partly reflecting a strong prior-year comparison.
- The company recorded $3.6 million in restructuring costs for reductions in consultants and support staff in response to continued weakness in European demand. The related accrual was $3.3 million at quarter-end.
- Hackett acquired Technolab’s U.S., Canadian and Uruguayan operations for $3.0 million in cash and $1.0 million in company shares. Sellers may earn up to an additional $8.0 million, subject to an earn-out. The preliminary allocation included $7.1 million of goodwill and $4.2 million of definite-lived intangible assets.
- Management said available cash, revolver capacity and operating cash flows should fund working capital and capital needs for at least the next 12 months. No specific earnings or revenue guidance was provided.
- Risks highlighted include continued demand weakness, particularly in Europe; retaining and winning clients; project timing or cancellation; hiring and retaining skilled staff; acquisition integration; collections; competition and pricing; foreign exchange; and access to additional financing. Debt bears variable interest rates. Management said ordinary-course legal matters were not expected to have a material adverse effect and reported no material change to previously disclosed risk factors.
Investor verification points
- Assess whether European demand and international revenue stabilize, and whether U.S. growth can offset further weakness.
- Track the impact of restructuring, including realized savings and remaining payments.
- Review Technolab integration, acquired intangible-asset assumptions, goodwill and potential earn-out obligations.
- Monitor operating cash conversion, receivables and unbilled revenue, and the timing of vendor and incentive payments.
- Verify debt covenant headroom, variable-rate exposure, and remaining borrowing and share-repurchase authorization.
- Controls and procedures were reported effective at quarter-end; the filing reported no material internal-control changes during the quarter.