HACKETT GROUP, INC. — Q2 2014 Form 10-Q
Business context and reporting period. The Hackett Group is a strategic advisory and technology consulting firm, including ERP solutions. This unaudited filing covers the quarter and six months ended June 27, 2014; comparisons are to the periods ended June 28, 2013. Amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue before reimbursements | $55.0 | $52.3 | $104.4 | $101.2 |
| Total revenue | $61.1 | $59.0 | $116.0 | $113.3 |
| Operating income (margin on revenue before reimbursements) | $5.0 (9.1%) | $5.1 (9.7%) | $3.3 (3.2%) | $8.6 (8.5%) |
| Net income | $3.5 | $2.9 | $1.4 | $4.9 |
| Diluted EPS | $0.12 | $0.09 | $0.05 | $0.15 |
| Operating cash flow | Not presented separately by quarter | $(7.4) | $5.2 |
- Q2 revenue grew 4%; six-month revenue grew 2%. Revenue before reimbursements is the company’s principal revenue measure. Q2 net income rose year over year, while six-month net income declined substantially.
- Q2 personnel cost of service was 62.5% of revenue before reimbursements, versus 63.7% a year earlier; SG&A was 28.4%, versus 26.6%. The filing does not provide a consolidated gross-margin figure.
- At June 27, 2014, cash and cash equivalents were $10.8, down from $18.2 at year-end 2013. Current assets were $60.7 and current liabilities $43.6. Total debt was approximately $29.7: $25.0 term debt and $4.5 revolver borrowings. The revolver had $15.5 of additional availability.
- Six-month investing cash outflow was $3.5, including $2.7 cash consideration for the Technolab acquisition, partly offset by acquired cash. Financing provided $3.4, including $10.5 of borrowings, offset in part by $7.3 of share repurchases.
Material changes and unusual items
- Six-month operating results included $3.6 of restructuring costs, primarily for personnel reductions in Europe following continued demand declines there. The quarter ended June 27 had no restructuring charge.
- Technolab’s U.S., Canadian and Uruguayan operations were acquired in the first quarter. Consideration included $3.0 cash and $1.0 in company shares; sellers may earn up to $8.0 in contingent consideration. The preliminary allocation included $7.6 of goodwill and $4.1 of definite-lived intangible assets.
- By service group, Q2 Hackett Group revenue was $49.2 versus $47.7; ERP Solutions was $11.9 versus $11.3. For the six months, Hackett Group revenue was $95.3 versus $91.3, while ERP Solutions declined to $20.7 from $22.0. Management attributed ERP Solutions’ Q2 growth to stronger-than-expected SAP license sales and the six-month decline to transition in the SAP sales channel.
- International revenue, primarily Europe, declined 5% in Q2 and 13% for the six months, according to management. U.S. growth and Technolab revenue supported Hackett Group’s overall growth; weaker European demand remained a headwind.
- The company repurchased approximately 1.2 million shares for $7.3 in the first six months. It had $2.3 remaining under the repurchase authorization at quarter-end; the board subsequently added $5.0 of authorization.
Outlook, risks and other disclosures
- No specific revenue or earnings guidance is provided. Management believed cash on hand, operating cash flows and revolver availability would fund working capital and capital expenditure needs for at least the next 12 months; additional financing may be sought, with no assurance it will be available.
- Management cited risks including acquisition integration, client retention and new business generation, project timing and cancellations, competition and pricing, attracting and retaining skilled staff, receivable collections, economic conditions, foreign exchange and variable-rate debt. European demand weakness is a current operating concern.
- Debt bears variable interest rates; management said a 100-basis-point increase would not have materially affected reported-period results. Foreign exchange did not materially affect results in the periods reported.
- Ordinary-course legal matters were not expected by management to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors and stated disclosure controls were effective, with no material change in internal control over financial reporting.
- A new revenue-recognition standard issued in May 2014 was not yet evaluated fully; it is effective for the company for annual and interim periods beginning on or after December 15, 2016, and early adoption is prohibited.
Investor facts to verify
- Whether European demand and the related restructuring produce the anticipated cost savings and stabilize international revenue.
- Whether operating cash flow recovers from the six-month outflow, particularly as receivables and unbilled revenue increased to $43.9 from $34.0 at year-end.
- Technolab’s integration, final purchase-price allocation and any earn-out obligation, which could reach $8.0.
- Debt covenant compliance, variable-rate exposure and the company’s capacity to fund repurchases and other capital needs while maintaining liquidity.
- Whether SAP channel transition affects ERP Solutions’ revenue beyond the reported six-month decline.