HACKETT GROUP, INC. — Q1 2012 Form 10-Q
Reporting period: Quarter ended March 30, 2012; comparison is with the quarter ended April 1, 2011. Amounts are in U.S. dollars. The Hackett Group provides strategic advisory, benchmarking, business transformation and technology consulting services, including ERP Solutions.
Financial performance
| Metric | Q1 2012 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $57.0 million | $52.9 million | Up 8% |
| Revenue before reimbursements | $51.6 million | $47.0 million | Up about 10% |
| Operating income | $3.7 million | $3.5 million | Up about 5% |
| Net income | $3.5 million | $3.3 million | Up about 6% |
| Diluted EPS | $0.09 | $0.08 | Up $0.01 |
| Operating margin on revenue before reimbursements | 7.1% | 7.4% | Down 0.3 percentage points |
| Net margin on revenue before reimbursements | 6.8% | 7.1% | Down 0.3 percentage points |
- Revenue mix: The Hackett Group service line generated $47.1 million, up 10%; ERP Solutions generated $9.9 million, down 2%. International revenue was $12.0 million, or 21% of total revenue, compared with 20% a year earlier. Foreign exchange did not significantly affect the comparison.
- Costs and margins: Personnel costs before reimbursable expenses rose 10% to $33.1 million, largely reflecting increased headcount. SG&A increased 12% to $14.8 million, driven primarily by incentive compensation, sales investment and Hackett Performance Exchange-related costs. Cost of service before reimbursements remained 64% of revenue before reimbursements. Management reported gross margins of 39% for The Hackett Group and 28% for ERP Solutions.
- Cash flow: Operating cash use was $3.8 million, versus $5.2 million used in the prior-year quarter. Investing cash use was $0.7 million, mainly for Hackett Performance Exchange development. Financing cash use was $15.7 million, primarily reflecting the tender offer.
- Liquidity and debt: Cash and cash equivalents were $12.8 million at March 30, down from $32.9 million at December 30, 2011; restricted cash was $0.7 million. The company had $40 million outstanding under its new credit facility ($30 million term loan and $10 million revolver), with $4.7 million of debt classified as current on the balance sheet. It repaid $4 million on the revolver after quarter-end. The facility has variable rates and financial covenants.
Material changes and notable items
- On March 21, the company completed a tender offer for 11 million shares at $5 per share, an aggregate cost of approximately $55 million before fees. It funded the purchase using $40 million of credit-facility proceeds and cash on hand. The tendered shares represented approximately 27% of shares then outstanding.
- Share-based compensation expense increased to $1.3 million from $0.9 million. The company granted 1.37 million restricted stock units during the quarter and issued performance-based options to its CEO and COO. Half of each option award vests upon achievement of at least 50% growth in pro forma EPS and the remainder upon at least 50% growth in pro forma EBITDA, measured against fiscal 2011.
- Cash used in operations improved year over year, which management attributed to lower incentive-compensation payouts, increased sales and lower days sales outstanding, partly offset by higher payments related to accounts payable.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management said available funds and operating cash flows were expected to cover working capital and capital expenditure needs for at least the next 12 months, while noting that additional financing may be sought and is not assured.
- Risks identified include client retention and new-business generation, project timing and cancellations, competition and margin trends, recruiting and retaining skilled employees, customer collection difficulties, acquisition integration, foreign-exchange movements, economic conditions and variable interest rates. The company reported no material changes to the risk factors in its latest Form 10-K.
- The company reported no derivative contracts to hedge currency risk and no derivative financial instruments for interest-rate exposure. Management stated ordinary-course legal matters were not expected to have a material adverse effect.
- Management concluded disclosure controls were effective as of period-end and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether post-quarter repayment of $4 million on the revolver materially changes debt, interest expense and covenant headroom.
- Cash conversion and working-capital trends, particularly accounts payable and accrued-liability movements following operating cash outflow.
- Whether revenue growth continues in The Hackett Group service line and international markets, and whether ERP Solutions stabilizes.
- Progress and spending on Hackett Performance Exchange, and whether SG&A investment produces sustainable growth and margins.
- Share count and dilution effects of the tender offer and performance-based awards, including achievement conditions for the executive options.
- Compliance with credit-facility covenants and exposure to variable interest rates, foreign exchange and customer concentration; one customer represented 5% of quarterly revenue.