HACKETT GROUP, INC. — Q3 2015 Form 10-Q
Business context and reporting period. The Hackett Group provides strategic advisory and technology consulting, including benchmarking, business transformation, EPM and SAP ERP services. This unaudited filing covers the quarter and nine months ended October 2, 2015; comparisons are with periods ended September 26, 2014. Amounts below are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Quarter 2015 | Quarter 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net revenue, before reimbursements | $60.0 | $54.6 | $174.3 | $159.0 |
| Total revenue | $67.2 | $60.4 | $194.6 | $176.4 |
| Operating income | $4.9 | $4.0 | $15.6 | $8.4 |
| Net income | $3.1 | $2.9 | $9.8 | $6.2 |
| Diluted GAAP EPS | $0.10 | $0.10 | $0.32 | $0.21 |
| Adjusted non-GAAP diluted EPS | $0.20 | $0.16 | $0.55 | $0.40 |
- Growth and margins: Total revenue rose 11% for the quarter and 10% for the nine-month period; management reported growth of 13% for both periods on a constant-currency basis. GAAP operating margin on net revenue was 8.2% versus 7.3% in the quarter and 9.0% versus 5.3% year to date. Adjusted non-GAAP gross margin was 39.6% versus 38.7% for the quarter and 39.0% versus 37.3% year to date.
- Cash flow: Nine-month operating cash flow was $19.2 million, versus $1.2 million a year earlier. Investing activities used $2.4 million; financing activities used $15.1 million. Cash increased $1.7 million to $16.3 million.
- Debt and liquidity: Long-term debt was $9.3 million, down from $18.3 million at January 2, 2015; the $20 million revolving facility had no borrowings. Current assets of $62.9 million exceeded current liabilities of $40.2 million. Management said cash, operating cash flow and available revolver capacity should fund working capital and capital expenditures for at least 12 months.
- Other financial items: The company paid its first semi-annual dividend of $0.10 per share, totaling $3.1 million, and declared a second $0.10 dividend payable in January 2016. Nine-month capital expenditures were $2.4 million. The GAAP tax rate was 37% for the quarter and 36% year to date, versus 23% and 22%, respectively, in 2014; management attributed the increase primarily to the geographic mix of taxable earnings.
Material changes versus prior periods
- Hackett Group U.S. revenue increased 25% for the quarter and 18% year to date; international revenue decreased 23% and 3%, respectively. International revenue represented 14% of quarterly total revenue, down from 21%.
- ERP Solutions revenue was flat for the quarter and down 3% year to date. Management said the year-to-date comparison reflected a significant 2014 software sale; excluding that sale, it reported 9% growth.
- Personnel costs increased with headcount, subcontractor costs and incentive compensation, but declined as a share of net revenue. SG&A also declined as a share of net revenue, reflecting improved operating leverage.
- Operating cash flow improved substantially, supported in part by non-cash adjustments and higher accrued liabilities, while receivables and unbilled revenue increased. Financing cash use included $11.5 million of debt repayments, $2.2 million of employee-related share purchases and $1.4 million of share repurchases.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or margin guidance. Management noted that future results may differ and are not necessarily indicated by interim results.
- Risks identified include retaining and winning clients, project timing and cancellations, attracting and retaining skilled employees, competition and pricing, customer collection difficulties, economic conditions, foreign-exchange movements, interest rates and acquisition integration.
- Management reported that a material weakness in internal control over financial reporting, relating to accounting for business combinations and identified in connection with the Technolab acquisition, existed at January 2, April 3 and July 3, 2015. Management implemented additional acquisition-accounting controls during Q3 and concluded the weakness was remediated and disclosure controls were effective as of October 2, 2015. It said the weakness had not caused a material misstatement in the periods identified.
- Technolab’s contingent earn-out was settled during Q3 with cash and stock. The 2014 acquisition had included a $3.0 million bargain-purchase gain and $3.6 million of restructuring costs; neither was recorded in the 2015 periods presented. Q3 2015 stock compensation included $1.3 million accrued for performance-based SARs tied to an EBITDA target. No customer represented more than 5% of revenue.
- Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect. The filing reported no material changes to the risk factors in the 2014 Form 10-K.
Important facts for investors to verify
- Whether U.S. growth can continue and international revenue declines stabilize, particularly given currency effects.
- Whether improved utilization, rates and operating leverage persist as personnel and incentive costs rise.
- What drove the unusually large year-over-year increase in operating cash flow, and whether collections and accrued liabilities normalize; receivables and unbilled revenue rose to $44.0 million from $37.4 million at year-end.
- Whether the acquisition-accounting control remediation remains effective in future transactions and reporting periods.
- Debt-facility covenant compliance, variable-rate exposure and the sustainability of dividends and repurchases alongside investment needs.
- The effects of higher GAAP tax expense, foreign-exchange movements and share-based compensation on reported earnings and per-share results.