Business context and reporting period
The Hackett Group, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 28, 2018. It provides strategic advisory, benchmarking and technology consulting services, along with software-related offerings. Comparisons are with the quarter and nine months ended September 29, 2017. Amounts below are in U.S. dollars.
Financial performance and liquidity
- Revenue: Third-quarter revenue before reimbursements rose 3.5% to $68.2 million; total revenue was $73.8 million. Nine-month revenue before reimbursements increased 3.3% to $205.3 million; total revenue was $222.2 million.
- Profit and margins: Third-quarter operating income was $7.6 million, down from $7.9 million; operating margin on revenue before reimbursements was 11.2%, versus 11.9%. Net income was $5.2 million versus $5.3 million, and diluted EPS was $0.16 versus $0.17. For nine months, operating income increased to $30.0 million from $22.3 million, with margin rising to 14.6% from 11.2%; net income was $24.0 million versus $17.9 million, and diluted EPS was $0.75 versus $0.56.
- Cash flow: Nine-month operating cash flow was $24.4 million, up from $19.0 million. Investing cash outflow was $7.3 million, mainly for systems, laptop replacements and Quantum Leap benchmark technology. Financing cash outflow was $21.4 million, including dividends, debt repayment and share purchases. Cash declined $4.3 million to $13.2 million.
- Debt and liquidity: Long-term debt was $11.5 million at September 28, down from $19.0 million at December 29, 2017. The revolving facility had $33.5 million of capacity available at quarter-end; the company reported covenant compliance. It subsequently repaid another $3.0 million, leaving $8.5 million outstanding. Management believed cash, borrowing capacity and operating cash flow would cover working capital and capital expenditure needs for at least 12 months.
- Other metrics: Accounts receivable and unbilled revenue, net, was $56.9 million, compared with $55.3 million at year-end. The company paid $10.0 million in dividends during the nine-month period and repurchased $4.3 million of shares, including employee tax-withholding repurchases. No shares were bought under the board-approved repurchase plan during the quarter.
Changes versus the prior comparable period
- The Hackett Group practice’s revenue before reimbursements grew 7% in both the quarter and nine-month period. SAP Solutions revenue declined 19% in the quarter and 17% year to date, attributed to the shift from on-premise to cloud offerings and loss of a large application-managed-services client.
- Growth in the U.S. Strategy and Business Transformation practice supported results; management cited weakness in the European Working Capital group. International revenue was flat for the quarter, while the nine-month increase also reflected the 2017 Aecus acquisition.
- Nine-month operating income benefited from a $3.75 million reduction in Jibe contingent-consideration liability and the absence of the prior-year $1.3 million restructuring charge. In the third quarter, an $0.8 million Jibe contingent-consideration expense was recorded.
- Revenue recognition standard ASC 606 was adopted effective December 31, 2017; management said adoption had no impact on the financial statements presented.
Outlook, commentary and risks
The filing provides no quantitative earnings or revenue guidance. Management said it would evaluate alternatives for the European Working Capital group over the coming months. It identified risks including retaining and winning clients, project timing and cancellations, competition and pricing, attracting and retaining skilled employees, customer collection difficulties, acquisition integration, foreign-exchange movements, economic conditions, interest rates and access to debt financing. One customer represented more than 7% of third-quarter revenue; no customer exceeded 5% in the nine-month period or comparable 2017 periods. The company reported ordinary-course legal matters that management did not expect to have a material adverse effect, and no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether growth and margins remain resilient as SAP Solutions declines and the European Working Capital group’s performance is assessed.
- The assumptions and future cash or compensation effects underlying Jibe and Aecus contingent consideration.
- Customer concentration, receivable and unbilled-revenue collection, and the sustainability of operating cash flow.
- Debt repayment progress, revolver availability and compliance with credit-facility covenants.
- The capital requirements and expected returns from systems and Quantum Leap technology investment, alongside dividends and share repurchases.