Business context and reporting period
The Hackett Group, Inc. is a strategic advisory, benchmarking, business transformation and technology consulting firm. This unaudited Form 10-Q covers the quarter ended March 29, 2013, compared with the quarter ended March 30, 2012. Results are not necessarily indicative of the full year.
Key financial metrics
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenue | $54.35 | $54.08 |
| Revenue before reimbursements | $48.87 | $49.04 |
| Operating income | $3.53 | $3.98 |
| Operating margin on revenue before reimbursements | 7.2% | 8.1% |
| Income from continuing operations | $2.03 | $3.85 |
| Net income | $1.96 | $3.53 |
| Diluted net income per share | $0.06 | $0.09 |
| Net cash used in operating activities | $0.55 | $3.83 |
- Personnel cost of service, excluding reimbursable expenses, was $32.04 million, or 65.6% of revenue before reimbursements, versus $30.56 million and 62.3% a year earlier. SG&A declined to $13.30 million, or 27.2% of revenue before reimbursements, from $14.51 million and 29.6%.
- Cash and cash equivalents were $11.34 million at March 29, 2013, down from $16.91 million at December 28, 2012; restricted cash was $0.68 million. Total debt was $20.53 million, all reported as long-term, versus $25.00 million at year-end, including $2.90 million current. The company had no borrowings on its $20 million revolving facility.
- Current assets were $52.00 million and current liabilities $26.23 million. Total assets were $142.99 million; shareholders’ equity was $96.23 million.
- Investing cash outflow was $0.66 million, primarily capital expenditures. Financing cash outflow was $4.16 million, primarily a $4.47 million term-loan repayment. Cash declined by $5.57 million during the quarter.
Material changes versus the prior comparable period
- Total revenue increased 0.5%, while revenue before reimbursements decreased 0.4%. The Hackett Group service-group revenue fell 7% to $43.61 million, which management attributed primarily to slower-than-expected ramp-up of client engagements. ERP Solutions revenue rose 54% to $10.74 million, primarily due to increased SAP demand.
- Operating income declined about 11%, and operating margin on revenue before reimbursements fell 0.9 percentage points. Higher personnel costs and greater subcontractor use more than offset lower SG&A, which management linked to cost-containment initiatives.
- Net income fell about 45%, reflecting lower operating income and income tax expense of $1.36 million versus $0.11 million. Management cited an estimated annual tax rate of 40.1% in 2013, compared with 2.7% in 2012, following prior releases of valuation allowances against tax-loss carryforwards.
- Operating cash use improved to $0.55 million from $3.83 million, primarily due to higher collections and changes in incentive-compensation payments. The 2012 financing comparison included the large share tender offer; Q1 2013 financing mainly reflected debt repayment.
- Foreign currency translation reduced comprehensive income by $1.46 million in Q1 2013, compared with a $0.67 million gain in Q1 2012.
Outlook, risks, contingencies and unusual items
- Management stated that cash on hand, available revolving credit and operating cash flows were expected to be sufficient for working capital and capital expenditures for at least the next 12 months. It also noted that additional financing might be sought for expansion, product development, competitive needs or acquisitions, with no assurance financing would be available.
- The company exited its Oracle ERP implementation business during the quarter; the transaction was described as not material. A $0.07 million loss from discontinued operations was reported, versus $0.32 million a year earlier.
- Interest-rate exposure is primarily from variable-rate debt; management said a 100-basis-point rate increase would not have materially affected Q1 2013 results. Foreign-currency exposure includes the British pound, euro and Australian dollar.
- Forward-looking risks include client retention and new business, project timing or cancellation, hiring and retaining skilled staff, collections, competition, pricing and margins, acquisitions, foreign exchange and economic conditions. The filing reported no material changes to previously disclosed risk factors.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. No material changes to contractual obligations were reported. Disclosure controls were concluded effective, with no material change in internal control over financial reporting.
- No shares were repurchased under the plan during the quarter. After quarter-end, the company repurchased 113,000 shares at an average $4.79 and the board approved an additional $5 million of authorization; the filing states $5 million remained available after that approval.
Important facts for investors to verify
- Whether the slower client-engagement ramp-up and decline in The Hackett Group service revenue persisted beyond Q1, and whether SAP-driven ERP growth was sustainable.
- How higher personnel costs and utilization of subcontractors affect margins as revenue mix and demand change.
- The drivers and cash implications of the substantially higher 2013 tax expense and the company’s ongoing effective tax rate.
- Term-loan amortization, variable-rate exposure and compliance with credit-facility leverage, coverage and liquidity covenants.
- Cash conversion and collections, including the sustainability of the improvement in operating cash use.
- The effects of the Oracle business exit and post-quarter share repurchases on future results, liquidity and share count.