The Hackett Group, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; comparisons are to the quarter and six months ended July 1, 2016. Dollar amounts below are in millions unless noted. Hackett provides strategic advisory and technology consulting, including Oracle and SAP services.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue before reimbursements | $67.7 | $68.2 | $132.8 | $130.2 |
| Total revenue, including reimbursements | $73.6 | $75.6 | $145.0 | $144.4 |
| Operating income | $6.5 | $8.6 | $14.4 | $15.9 |
| Net income | $4.8 | $5.4 | $12.6 | $9.8 |
| Diluted EPS | $0.15 | $0.17 | $0.39 | $0.30 |
| Operating margin on revenue before reimbursements | 9.5% | 12.7% | 10.9% | 12.2% |
| Operating cash flow | Not stated for quarter | $9.0 | $7.8 |
Q2 adjusted non-GAAP net income was $8.0 million ($0.25 per diluted share), versus $7.8 million ($0.24) a year earlier. For the six months, adjusted non-GAAP net income was $15.4 million ($0.47 per diluted share), versus $14.4 million ($0.43). These company-defined non-GAAP measures exclude specified stock compensation, amortization, acquisition and restructuring items and assume a normalized 30% tax rate. Adjusted gross margin was 40% in Q2 and 39% for the six months, versus 39% and 38%, respectively, in 2016.
At June 30, cash was $14.4 million, current assets $68.0 million, and current liabilities $45.2 million. Long-term debt was $20.0 million, up from $7.0 million at December 30, 2016; $25.0 million of the $45.0 million revolving facility remained available. The variable-rate borrowing rate was 2.56%, and the company reported compliance with its credit covenants. Six-month investing cash use was $12.0 million, primarily for acquisitions and capital expenditures; financing cash use was $2.3 million. Cash declined $5.3 million from year-end.
Material changes and business developments
- Q2 revenue before reimbursements declined less than 1%; six-month revenue rose 2%. Q2 GAAP operating income and net income decreased, while six-month net income increased, aided in part by lower income-tax expense.
- Management attributed domestic Hackett revenue weakness to the transition from on-premise software to cloud implementations and softer activity in some practices. Hackett international revenue grew strongly, particularly in Europe; SAP Solutions revenue also increased.
- International revenue represented 21% of total Q2 revenue, versus 14% a year earlier. No customer accounted for more than 5% of revenue in either comparison period.
- Hackett acquired Jibe Consulting and Aecus Limited in Q2 to expand Oracle cloud/EBS, outsourcing advisory and robotic process automation capabilities. Jibe contributed $2.8 million of Q2 revenue before reimbursements; Aecus contributed $1.3 million. Purchase price allocations were preliminary.
Outlook, risks and unusual items
- The filing gives no specific revenue or earnings guidance. Management said available cash, operating cash flow and borrowing capacity were expected to fund working capital and capital expenditure needs for at least the next 12 months.
- Q2 included $1.3 million of restructuring costs, primarily related to cloud-transition staffing, the Jibe acquisition and resource realignment for RPA work. The remaining $0.2 million restructuring commitment was expected to be used in the following quarter.
- Jibe sellers may receive up to an additional $11.0 million in cash and stock based on performance targets. Aecus sellers and key personnel have additional contingent cash and equity arrangements. Acquisition valuations and related goodwill, intangibles and tax balances remained subject to measurement-period revisions.
- Risks cited include acquisition integration and retention, winning and retaining clients, project timing or cancellation, attracting skilled employees, collections, competition, margins, foreign exchange, economic conditions, interest rates and access to financing. Management said ordinary-course litigation was not expected to have a material adverse effect; no material risk-factor changes were reported.
- The company repurchased $8.8 million of shares under its plan during the first six months and paid $4.0 million in dividends. The board subsequently added $5.0 million to repurchase authorization; the annual dividend had been increased to $0.30 per share.
Important facts for investors to verify
- Whether domestic consulting demand and the on-premise-to-cloud transition continue to pressure Hackett revenue and operating margins.
- Whether international and SAP Solutions growth can offset domestic weakness, and how acquisition contributions develop.
- Final acquisition purchase allocations, contingent consideration earned, integration costs and resulting goodwill or amortization.
- Cash conversion, collections and working-capital trends, alongside continued buybacks and dividends.
- Revolver usage, variable-rate exposure and ongoing compliance with debt covenants.