HACKETT GROUP, INC. — Q2 2011 Form 10-Q
Business context and period. Hackett provides strategic advisory, benchmarking, business transformation, working-capital management, and ERP technology consulting. This unaudited filing covers the quarter and six months ended July 1, 2011, compared with periods ended July 2, 2010. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue before reimbursements | $52.4 | $48.0 | $99.3 | $89.8 |
| Total revenue | $58.8 | $53.7 | $111.7 | $100.4 |
| Operating income | $4.5 | $3.8 | $8.0 | $5.6 |
| Net income | $4.4 | $4.4 | $7.7 | $7.1 |
| Diluted EPS | $0.10 | $0.10 | $0.18 | $0.17 |
| Operating margin, as reported | 8.6% | 7.8% | 8.0% | 6.3% |
| Net margin on revenue before reimbursements | 8.4% | 9.3% | 7.8% | 7.9% |
- Revenue before reimbursements rose about 9% in Q2 and 11% for the first half. ERP Solutions revenue increased 41% and 44%, respectively; The Hackett Group service line increased 4% and 5%.
- Personnel costs before reimbursable expenses increased 12% in Q2 and 13% year to date, primarily with higher headcount. These costs rose to 62.6% and 63.5% of revenue before reimbursements, respectively, from 61.1% and 62.4%.
- SG&A was nearly flat in dollars, while declining to 28.8% of Q2 revenue before reimbursements from 31.1%, reflecting leverage on higher revenue. Management reported Q2 gross margins of 40% for The Hackett Group and 36% for ERP Solutions; first-half margins were 39% and 35%.
- Q2 net income was slightly lower than prior year despite higher operating income. The 2010 comparison included a non-cash acquisition earn-out remeasurement gain of $0.8 million for the quarter and $1.7 million for the first half; no such gain was recorded in 2011.
Cash, liquidity, and balance sheet
- Cash and cash equivalents were $17.9 million at July 1, 2011, down from $25.3 million at year-end 2010; restricted cash was $1.6 million. Current assets were $60.2 million and current liabilities $30.7 million.
- First-half operating cash flow was $1.6 million, versus $6.0 million in 2010. The company cited incentive-compensation payouts and higher receivables and unbilled revenue, which increased $4.8 million in operating cash-flow terms.
- Investing cash outflow was $3.3 million, principally for product development and technology equipment. Financing cash outflow was $5.7 million, largely due to $6.0 million of share repurchases. Cash declined by $7.5 million in the first half.
- Total liabilities were $33.3 million. The balance sheet reports no interest-bearing debt. Accounts receivable and unbilled revenue, net, were $37.0 million, up from $31.6 million at year-end.
Changes, outlook, and risks
- The company repurchased approximately 830,000 shares in Q2 for $3.6 million, at an average $4.38 per share. It had $3.5 million remaining under its repurchase authorization at July 1; the board added $5.0 million to the program during the quarter.
- Management stated that available funds and operating cash flows should cover working-capital and capital-expenditure needs for at least the next 12 months. No specific revenue or earnings guidance was provided. Management noted that additional financing might be sought for expansion, product development, competitive needs, or acquisitions, with no assurance it would be available.
- Key disclosed risks include retaining and attracting clients and skilled employees, project timing and cancellations, customer collection difficulties, competition and margin pressure, foreign-exchange movements, and general economic conditions. The company had no currency hedges. Management said risk factors were unchanged from its latest 10-K.
- Ordinary-course legal matters were not expected by management to have a material adverse effect. A $0.9 million accrual remained for legacy facility closure and consolidation costs. Disclosure controls were judged effective, with no material change in internal controls reported.
Important facts for investors to verify
- Whether higher headcount and project utilization convert revenue growth into sustainable margins and operating cash flow.
- Receivable collections, unbilled revenue, and the effect of incentive compensation payments on future cash generation.
- The sustainability and mix of ERP Solutions growth, and the basis for reported service-line margin differences.
- The effects of ongoing share repurchases and stock-based compensation on cash, share count, and diluted EPS.
- Whether cash-flow and liquidity expectations remain adequate if demand, collections, or access to financing deteriorate.