HACKETT GROUP, INC. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 29, 2012; comparisons are to the periods ended July 1, 2011. Hackett provides strategic advisory, benchmarking, business transformation and technology consulting services through The Hackett Group and ERP Solutions.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $61.3m | $58.8m | $118.3m | $111.7m |
| Revenue before reimbursements | $54.2m | $52.4m | $105.8m | $99.3m |
| Operating income | $4.5m | $4.5m | $8.1m | $8.0m |
| Net income | $3.8m | $4.4m | $7.4m | $7.7m |
| Diluted EPS | $0.12 | $0.10 | $0.21 | $0.18 |
| Operating cash flow | Not separately reported | Not separately reported | $6.3m | $1.6m |
- Total revenue grew 4% in Q2 and 6% year to date; management reported constant-currency growth of 6% and 7%, respectively. Revenue before reimbursements grew approximately 4% and 7%.
- Q2 operating margin was 8.3% of revenue before reimbursements, versus 8.6%; net margin was 7.1%, versus 8.4%. For the six months, operating margin was 7.7%, versus 8.0%, and net margin was 7.0%, versus 7.8%.
- The Hackett Group service revenue rose 7% in Q2 and 9% year to date; ERP Solutions revenue fell 7% and 4%, respectively, primarily due to lower Oracle ERP market demand. Management reported gross margins of 39% for The Hackett Group in both periods; ERP Solutions margins were 34% in Q2 and 31% year to date.
- Q2 cost of service before reimbursements increased 6%, attributed primarily to higher headcount aligned with market demand. SG&A was nearly flat in Q2 and rose 6% year to date; as a share of revenue before reimbursements, it declined to 28% from 29%.
Balance sheet, cash flow and capital allocation
- At June 29, 2012, cash and cash equivalents were $13.8m, down from $32.9m at December 30, 2011. Current assets were $60.0m and current liabilities $38.9m.
- Total debt was $32.0m: $30.0m under the term loan and $2.0m under the revolver. The company subsequently repaid the revolver balance in full. The facility provides a $20.0m revolving line and $30.0m term loan; $18.0m of revolver capacity was available at June 29.
- Six-month operating cash flow was $6.3m; investing cash outflow was $1.9m, mainly capital expenditures for Hackett Performance Exchange development. Financing cash outflow was $23.6m, including the impact of the share tender offer and debt activity.
- On March 21, the company completed a tender offer for 11.0m shares at $5.00 per share, costing approximately $55.0m before fees. It used $40.0m of facility proceeds and cash on hand. No shares were repurchased under the separate repurchase plan during the quarter; $0.6m remained authorized.
Outlook, risks and unusual items
- Management said cash, available borrowing capacity and operating cash flows should fund working capital and capital expenditure needs for at least the next 12 months. No specific earnings or revenue guidance was provided.
- The credit facility carries variable interest rates and is secured by substantially all company assets, subject to exceptions. It includes leverage, fixed-cost-coverage and liquidity covenants, with term-loan amortization beginning October 1, 2012. Management stated that a 100-basis-point rate increase would not have materially affected Q2 results.
- Management cited risks including customer retention and acquisition, project timing and cancellations, competition and pricing, hiring and retention of skilled employees, customer collection difficulties, foreign-exchange movements, economic conditions, and acquisition integration. One customer represented 5% of revenue in both Q2 and the six-month 2012 period; none exceeded 5% in the comparable 2011 periods.
- During Q2, the company released its remaining U.S. federal valuation allowance; because it did not offset current-quarter federal taxes, an additional $0.2m of federal tax expense was recorded. The filing reports ordinary-course legal matters and management does not expect them to have a material adverse effect. No material risk-factor changes were reported.
- The company granted performance-based options tied to achieving at least 50% growth from fiscal 2011 in defined pro forma EPS and EBITDA measures. The targets had not been achieved as of June 29, 2012, but non-cash compensation expense was recorded.
Key facts for investors to verify
- Whether revenue growth in the core Hackett Group business continues and whether ERP Solutions demand stabilizes.
- Cash generation, working-capital collections, and liquidity after the tender offer and revolver repayment.
- Debt amortization, variable-rate exposure, and compliance with facility covenants.
- Effects of the substantial tender-offer repurchase on per-share results, and the potential dilution and expense from performance-based awards.
- Customer concentration, foreign-exchange exposure, and the outcome of ordinary-course legal matters.