The Hackett Group, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 27, 2013. The company provides strategic advisory and technology consulting, including business transformation, benchmarking, EPM and SAP ERP services. Amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $57.9 | $55.6 | $171.2 | $167.7 |
| Revenue before reimbursements | $52.0 | $49.8 | $153.2 | $150.3 |
| Operating income | $4.7 | $4.5 | $13.3 | $13.0 |
| Net income | $2.6 | $2.6 | $7.5 | $10.0 |
| Diluted EPS | $0.08 | $0.08 | $0.23 | $0.29 |
| Operating margin on revenue before reimbursements | 9.0% | 9.1% | 8.7% | 8.6% |
- Q3 total revenue increased 4%; revenue before reimbursements also increased about 4%. The Hackett Group service revenue rose 7%, while ERP Solutions revenue declined 10% year over year.
- Nine-month total revenue increased 2%. The Hackett Group revenue declined 2%, partly offset by ERP Solutions growth of 25%.
- Personnel cost of service before reimbursable expenses rose 7% in Q3 and 5% year to date. As a share of revenue before reimbursements, it increased to 65% in Q3 and for the nine-month period, versus 64% and 63%, respectively. Management attributed the increase primarily to greater subcontractor use in SAP and EPM Oracle groups.
- SG&A fell to $13.3 million in Q3 from $13.9 million and to $40.5 million year to date from $43.2 million. Management cited 2013 cost-containment initiatives.
- Effective estimated tax rates were 41.6% for Q3 and 41.0% year to date in 2013, compared with 9.6% and 6.5% in 2012. The filing attributes the higher rates to prior releases of valuation allowances on tax-loss carryforwards. This contributed to lower year-to-date continuing-operations income despite higher operating income.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $9.0 million, down from $11.1 million. Investing cash use was $1.5 million, primarily for development of the Hackett Performance Exchange; financing cash use was $9.6 million, mainly reflecting $10.0 million of debt repayments.
- Cash and cash equivalents were $14.9 million at September 27, 2013, down from $16.9 million at December 28, 2012. Restricted cash was $0.5 million.
- Long-term debt was $15.0 million at quarter-end, with no current portion reported; cash was slightly below debt. The amended credit facility matures August 27, 2018, has a $20 million revolver with no balance drawn at quarter-end, and provides additional term-loan borrowing capacity. The company reported $22.0 million of total principal outstanding as of October 30, after $7.0 million of subsequent borrowing.
- Management said cash, operating cash flows and the $20 million available revolver were expected to fund working capital and capital expenditures for at least the next 12 months. The facility is secured by substantially all company assets, subject to exceptions, and includes leverage, fixed-cost coverage and liquidity covenants.
Material developments, outlook and risks
- The company exited its Oracle ERP implementation business in Q1 2013; the filing says the transaction was not material to consolidated results.
- A tender offer completed October 15, after quarter-end, repurchased approximately 1.0 million shares at $7.00 each for about $6.9 million, excluding fees, funded with term-loan borrowings. The board also expanded the share repurchase program by $5 million; the filing reports $10 million of authorization remaining after the change.
- On November 5, the board declared an annual cash dividend of $0.10 per share, payable December 20, 2013, to shareholders of record December 10.
- Management noted increased Q3 demand in Business Transformation and EPM, but lower-than-planned performance in Europe adversely affected Hackett Group margins. Foreign exchange did not materially affect reported results.
- No specific earnings or revenue guidance is provided. Forward-looking risks include client retention and new business generation, project timing or cancellation, hiring and retaining skilled staff, customer collection difficulties, competition and pricing, foreign exchange, economic conditions, interest rates, acquisition integration, and access to additional financing.
- Ordinary-course legal proceedings are not expected by management to have a material adverse effect. The company reported no material changes to previously disclosed risk factors, effective disclosure controls, and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Review whether elevated tax rates persist and how tax valuation allowances affect comparability with 2012.
- Track consulting utilization, subcontractor costs, Europe performance and the differing trends in The Hackett Group and ERP Solutions revenue.
- Confirm cash generation and covenant headroom after the post-quarter borrowing, tender offer and dividend.
- Assess the impact of share repurchases and stock-based compensation on diluted share count and per-share results.
- Verify subsequent-period operating performance against the company’s stated liquidity expectations; the filing provides no formal financial guidance.