Business context and reporting period
The Hackett Group, Inc. is an IP-based strategic advisory and technology consulting firm, including its Hackett Group practices and SAP Solutions Group (Answerthink). This unaudited Form 10-Q covers the quarter and six months ended June 29, 2018; comparisons are with the quarter and six months ended June 30, 2017. Unless noted otherwise, amounts are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue before reimbursements | $69.6m | $67.7m | $137.1m | $132.8m |
| Total revenue | $75.6m | $73.6m | $148.4m | $145.0m |
| Operating income | $14.0m | $6.5m | $22.4m | $14.4m |
| Net income | $11.5m | $4.8m | $18.9m | $12.6m |
| Diluted EPS | $0.36 | $0.15 | $0.59 | $0.39 |
| Operating cash flow | — | $14.8m | $9.0m |
- Revenue before reimbursements grew 3% in both the quarter and first half. Operating margin on that revenue was 20.2% in Q2 and 16.3% for the first half, versus 9.5% and 10.9% in the comparable periods.
- Q2 operating income included a $4.6m benefit from reducing the Jibe acquisition contingent-consideration liability. This unusual benefit materially raised reported earnings; excluding it, Q2 operating income would be approximately $9.5m, based on the reported amount and benefit.
- First-half operating cash flow improved to $14.8m. Investing cash outflow was $5.2m, including purchases of property and equipment; financing cash outflow was $13.9m, principally dividends, debt repayment and share repurchases. Cash declined $4.2m to $13.3m.
- At June 29, 2018, total assets were $185.9m, current assets $73.3m and current liabilities $42.5m. Long-term debt was $13.5m, down from $19.0m at December 29, 2017. The revolving facility had $31.5m of remaining capacity; the company reported compliance with all debt covenants. The variable-rate debt carried a 3.5% interest rate.
- Receivables and unbilled revenue, net, were $56.8m versus $55.3m at year-end; unbilled revenue rose to $20.3m from $12.9m. The company recorded $5.4m of cash taxes paid in the first half.
Material changes versus prior periods
- The Hackett Group segment’s revenue before reimbursements increased 6% in Q2 and 7% in the first half. Management cited Strategy and Business Transformation growth; first-half growth also reflected the Jibe acquisition.
- SAP Solutions revenue fell 17% in Q2 and 16% in the first half, which management attributed primarily to client transitions from on-premise to cloud offerings and the loss of a significant application-managed-services contract.
- Q2 revenue before reimbursements rose in North America to $57.2m from $52.6m, while international revenue declined to $12.4m from $15.1m. For the first half, both regions increased year over year.
- Personnel costs before reimbursements increased to 61.8% of revenue before reimbursements in Q2 from 60.5%; management cited higher average headcount, subcontractor use and incentive compensation. The prior-year periods included $1.3m of restructuring expense; no restructuring cost was recorded in 2018.
- First-half capital spending increased to $5.2m from $2.9m, for internal systems, a laptop rollout and Quantum Leap benchmark technology. The prior-year investing cash outflow also included acquisition consideration.
Outlook, commentary and risks
- No specific revenue or earnings guidance is provided in the filing. Management said cash on hand, available revolver capacity and operating cash flows should fund working capital and capital expenditure needs for at least the next 12 months, while noting that additional financing may not be available when needed.
- Management identified risks including retention and acquisition of clients, project timing and cancellations, competition and pricing, attracting and retaining skilled employees, customer collection problems, acquisition integration, foreign-exchange movements, economic conditions and interest rates.
- The company operates internationally and is exposed to currency movements, particularly in the British pound, euro and Australian dollar. Management said currency movements did not significantly affect the reported comparisons. A 100-basis-point increase in borrowing rates was not expected to have had a material impact in the period.
- Ordinary-course legal proceedings were not expected by management to have a material adverse effect. The company reported effective disclosure controls and no material changes to the risk factors in its 2017 Form 10-K.
- ASC 606 was adopted effective December 31, 2017, with no impact on the financial statements for the periods presented. The company was assessing the impact of the forthcoming lease accounting standard.
Important facts for investors to verify
- Assess how much of Q2’s operating-income improvement is sustainable after separating the $4.6m Jibe contingent-liability benefit from underlying performance.
- Track SAP Solutions’ recovery or continued weakness following the cloud transition and loss of a significant services contract.
- Monitor receivables and unbilled revenue, cash conversion, and the drivers of the increase in unbilled balances.
- Review cash use for dividends and repurchases against debt reduction, capital investment and remaining revolver availability.
- Confirm the timing and amount of acquisition earnouts and related compensation adjustments, as well as the effect of foreign exchange and variable interest rates.