HACKETT GROUP, INC. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; comparable periods ended October 1, 2010. Unaudited consolidated results. Hackett provides strategic advisory, benchmarking, business transformation, working-capital management, and ERP technology consulting services.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $57.9 million | $52.3 million | $169.6 million | $152.7 million |
| Revenue before reimbursements | $51.6 million | $47.3 million | $150.9 million | $137.2 million |
| Operating income | $4.5 million | $3.9 million | $12.5 million | $9.5 million |
| Operating margin on revenue before reimbursements | 8.7% | 8.3% | 8.3% | 6.9% |
| Net income | $4.3 million | $4.1 million | $12.1 million | $11.2 million |
| Diluted EPS | $0.10 | $0.10 | $0.29 | $0.27 |
| Operating cash flow | — | $3.4 million | $14.4 million |
Gross margin before reimbursements was 40% for The Hackett Group and 32% for ERP Solutions in Q3; for the nine months, 39% and 34%, respectively. Cost of service before reimbursements rose to 64% of revenue before reimbursements in both 2011 periods, from 62% in the comparables. SG&A was 28% of that revenue in Q3 and the nine-month period, versus 30% and 31%, respectively. Net margin on revenue before reimbursements was 8.4% for Q3 and 8.0% year to date, compared with 8.7% and 8.2%.
Balance sheet and liquidity
- At September 30, 2011, cash and cash equivalents were $18.0 million, down from $25.3 million at December 31, 2010; restricted cash was $1.6 million.
- Current assets were $61.5 million and current liabilities $28.0 million. Total liabilities were $30.6 million and shareholders’ equity $121.9 million. The filing reports no debt balance.
- Accounts receivable and unbilled revenue, net, increased to $38.5 million from $31.6 million at year-end, contributing to operating cash use of working capital.
- Nine-month investing cash outflow was $4.2 million, principally for Hackett Performance Exchange development and a laptop rollout. Financing cash outflow was $6.7 million, primarily $7.0 million of share repurchases.
Changes, outlook, and risks
- Total revenue grew 11% in both the quarter and year to date. ERP Solutions revenue increased 17% in Q3 and 34% year to date; The Hackett Group service revenue rose 9% and 7%, respectively. International revenue increased as a share of total revenue.
- Management attributed higher service costs to increased headcount aligned with market demand; SG&A leverage on higher revenue improved its share of revenue. Operating margins improved, while Q3 and year-to-date net margins were lower than the comparable periods.
- Year-to-date operating cash flow fell to $3.4 million from $14.4 million. Management cited payment of 2010 incentive compensation awards and higher receivables/unbilled revenue; 2010 cash generation also benefited from a decrease in days sales outstanding.
- The prior-year nine-month period included a $1.7 million non-cash gain from remeasurement of Archstone acquisition earn-out shares; there was no such gain in 2011.
- Management believed available funds and operating cash flows would cover working-capital and capital-expenditure needs for at least 12 months. No specific revenue or earnings guidance was provided. The company had $2.5 million remaining under its repurchase authorization.
- Risks cited include project timing and cancellations, client retention and collections, competition and pricing/margins, hiring and retaining skilled staff, economic conditions, foreign-exchange movements, and acquisition integration. The company reported no material change to previously disclosed risk factors, no material adverse effect expected from ordinary-course legal matters, and effective disclosure controls.
- Foreign-currency exposure was primarily to the British pound, euro, and Australian dollar; the company had no currency-hedging derivatives. A $656,000 accrual remained for older facility restructuring costs.
Investor facts to verify
- Whether higher receivables and unbilled revenue convert to cash and whether operating cash flow recovers.
- Whether headcount growth supports demand without further pressure on service costs and margins.
- Revenue trends by service group and geography, including the pace of ERP Solutions growth.
- Cash use from capital spending and repurchases, and the adequacy of liquidity against management’s 12-month assessment.
- Exposure to currency movements, project cancellations, client credit/collections, and outstanding restructuring obligations.