Business context and reporting period
The Hackett Group, Inc. is a strategic advisory and technology consulting firm, including its Hackett Group and ERP Solutions service groups. This unaudited Form 10-Q covers the quarter and six months ended July 1, 2016; comparisons are with the quarter and six months ended July 3, 2015. Amounts below are in U.S. dollars.
Financial performance and position
- Revenue: Second-quarter total revenue was $75.6 million, up 14% year over year; revenue before reimbursements was $68.2 million, up about 15%. Six-month total revenue was $144.4 million, up 13.4%; revenue before reimbursements was $130.2 million, up about 13.8%.
- Profit and margins: Second-quarter operating income was $8.6 million versus $6.0 million, and net income was $5.4 million versus $3.7 million. Diluted GAAP EPS was $0.17 versus $0.12. For six months, operating income was $15.9 million versus $10.7 million, net income was $9.8 million versus $6.7 million, and diluted EPS was $0.30 versus $0.22. GAAP operating margin on revenue before reimbursements was 12.7% for the quarter and 12.2% for six months, compared with 10.2% and 9.3%. Adjusted non-GAAP diluted EPS was $0.24 for the quarter and $0.43 for six months, compared with $0.19 and $0.35; the company’s non-GAAP measure excludes specified stock compensation, intangible amortization and acquisition-related items and uses a normalized 30% tax rate.
- Cash flow: Six-month operating cash flow was $7.8 million, up from $6.7 million. Investing cash use was $1.3 million, primarily capital expenditures. Financing cash use was $14.4 million, reflecting repurchases and dividends, partly offset by net borrowing. Cash declined by $7.9 million to $15.6 million.
- Liquidity and debt: Current assets were $65.4 million and current liabilities $46.7 million at July 1. The company reported $22.0 million outstanding on its revolving credit facility (balance-sheet long-term debt was $21.5 million, net of debt issuance costs), with approximately $23.0 million of remaining capacity under the $45.0 million facility. The facility matures May 9, 2021; the company reported compliance with its covenants.
- Other metrics: Adjusted non-GAAP gross margin was 38.6% for the quarter and 38.3% for six months, versus 38.7% in both prior-year periods. Accounts receivable and unbilled revenue, net, rose to $47.5 million from $42.0 million at January 1, 2016.
Material changes and management commentary
- Management attributed growth primarily to strong U.S. demand across most practices. The Hackett Group service group grew 17% in the quarter and 15% for six months; U.S. Hackett revenue grew 23% and 22%, respectively. International revenue fell 4% in the quarter and 12% for six months, principally due to Asia-Pacific declines; European revenue was essentially flat. ERP Solutions revenue fell 5% in the quarter but rose 5% for six months.
- Personnel costs increased with headcount and incentive compensation, while SG&A as a share of revenue before reimbursements improved to 24% from 27% in both comparison periods, reflecting revenue leverage. GAAP income tax expense increased with higher taxable income and the geographic mix of earnings.
- During the first six months, the company repurchased approximately 2.0 million shares for $29.6 million under its program and bought back additional shares to satisfy employee tax obligations. A notable portion of the quarter’s repurchases—about 1.5 million shares at $14.77 per share—was from the CEO, COO and CFO, following approval by independent directors. The company said the transaction was expected to reduce weighted-average shares by about 4% and add $0.03–$0.04 to annualized EPS. The repurchase was funded with credit-facility borrowings. The annual dividend was increased to $0.26 per share; a $0.13 semiannual dividend was paid July 11, 2016.
- Management stated that cash, operating cash flow and available revolver capacity should be sufficient for working capital and capital expenditures for at least the next 12 months. No specific revenue or earnings guidance was provided.
Outlook, risks and contingencies
Forward-looking results are subject to risks including client retention and new business generation, project timing and cancellations, competition and pricing, recruiting and retaining skilled employees, customer collection difficulties, foreign-exchange movements, economic conditions, and access to financing. Management said currency effects were not material to current-period results; the company nevertheless has exposure to foreign currencies and variable interest rates. A 100-basis-point rate increase was not expected to have had a material impact on period results. The company reported ordinary-course legal proceedings and claims, which management did not expect to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether U.S. growth can offset ongoing international weakness, particularly in Asia-Pacific, and the recent quarterly decline in ERP Solutions.
- Receivables and unbilled revenue growth, collection trends, and the effect of working-capital movements on operating cash flow.
- Debt levels, revolver availability, covenant compliance, and the funding and returns of continued repurchases and dividends.
- The terms, governance review and actual per-share impact of the related-party repurchases from senior executives.
- Differences between GAAP and adjusted non-GAAP results, including excluded compensation and the assumed 30% adjusted tax rate.