HACKETT GROUP, INC. quarterly report, Q1 FY2017

Business context and reporting period

The Hackett Group, Inc. is a strategic advisory and technology consulting firm, including Hackett Group services and ERP Solutions. This unaudited Form 10-Q covers the quarter ended March 31, 2017; comparisons are with the quarter ended April 1, 2016. Amounts below are in millions unless stated otherwise.

Financial results and liquidity

• Revenue before reimbursements grew 5% year over year; total revenue grew 4% (5% in constant currency). Operating margin on revenue before reimbursements was 12.2%, versus 11.7%.
• Adjusted non-GAAP net income was $7.3 million ($0.23 per diluted share), versus $6.6 million ($0.20); adjusted EBITDA was $11.2 million, versus $10.1 million. These are non-GAAP measures defined by the company.
• Cash was $17.1 million at March 31, compared with $19.7 million at December 30, 2016. Current assets were $69.6 million and current liabilities $45.8 million. Accounts receivable and unbilled revenue, net, rose to $49.9 million from $47.4 million.
• Long-term debt was $9.0 million, up from $7.0 million at year-end. The $45 million revolving facility had $36 million of remaining capacity; the interest rate was 2.43%, and the company reported compliance with covenants.
• Financing cash use was $5.9 million, including a $4.0 million dividend payment and $4.1 million in total share repurchases, partly offset by $2.0 million of net revolver borrowings. The company raised its annual dividend to $0.30 per share, payable semi-annually.

Material changes versus the prior period

• Hackett Group revenue increased 4% to $60.2 million, supported by 38% growth in international revenue, primarily Europe. Domestic Hackett revenue declined 2%, which management attributed to accelerated on-premise-to-cloud migration and softer-than-expected activity in other domestic practices.
• ERP Solutions revenue increased approximately 3% to $11.2 million. International revenue rose to 17% of total revenue from 13%.
• Net income increased partly because Q1 2017 recorded no income tax expense following adoption of share-based payment accounting guidance. Management said the effective tax rate excluding that effect would have been 35.0%; Q1 2016 tax expense was $2.8 million.
• Operating cash flow improved to $4.9 million from $0.5 million, while cash declined due to dividends, share repurchases, and employee tax-withholding share purchases.

Outlook, commentary, risks and unusual items

• No specific revenue or earnings guidance was provided. Management said cash, revolver availability, and operating cash flows were expected to fund working capital and capital expenditure needs for at least the next 12 months; additional financing may be sought for expansion or acquisitions, with no assurance it will be available.
• After quarter-end, the company acquired Jibe Consulting for $5.4 million cash and $3.6 million in vesting shares, with up to $11.0 million of contingent consideration. It also acquired U.K. operations of Aecus for £3.2 million cash, with up to £3.0 million contingent consideration. Purchase accounting information was incomplete when the filing was issued.
• Management cited risks including acquisition integration, client retention and demand, project timing or cancellation, skilled-staff retention, collections, competition, margins, foreign exchange, economic conditions, interest rates, and access to borrowing. A 100-basis-point rate increase was not expected to materially affect quarterly results.
• Ordinary-course legal proceedings were not expected by management to have a material adverse effect. The filing reported no material change in previously disclosed risk factors and stated disclosure controls were effective.

Important facts for investors to verify

• Whether domestic demand and the cloud-migration transition improve, and whether international growth continues.
• The recurring earnings and cash-tax implications of the share-based payment accounting change; reported zero tax expense materially differs from the normalized tax assumption used in adjusted results.
• Working-capital and collection trends, particularly accounts receivable and unbilled revenue, and the sustainability of operating cash flow.
• Post-quarter Jibe and Aecus acquisition funding, contingent payments, integration progress, and final purchase accounting.
• Revolver borrowing, covenant compliance, and the company’s capacity to maintain dividends and repurchases while funding acquisitions and investment.