The Hackett Group, Inc. — Q3 2017 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the quarter and nine months ended September 29, 2017; comparative periods ended September 30, 2016. Hackett provides strategic advisory and technology consulting, including benchmarking, business transformation, enterprise performance management, Oracle Cloud and SAP services. Financial figures below are in millions of dollars, except per-share data.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue before reimbursements | $65.9 | $66.8 | $198.7 | $197.0 |
| Total revenue | $71.5 | $74.1 | $216.5 | $218.5 |
| Operating income | $7.9 | $9.0 | $22.3 | $24.9 |
| Operating margin on revenue before reimbursements | 11.9% | 13.5% | 11.2% | 12.6% |
| Net income | $5.3 | $5.5 | $17.9 | $15.3 |
| Diluted EPS | $0.17 | $0.17 | $0.56 | $0.47 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $19.0 | $20.8 |
Q3 revenue before reimbursements declined about 1%; total revenue fell about 4%, largely reflecting lower reimbursable expenses, which management says do not affect profitability. Nine-month revenue before reimbursements grew about 1%, while total revenue decreased about 1%. GAAP net income fell about 4% in Q3 but increased about 17% for the nine months. The nine-month tax expense was $4.0 million versus $9.3 million in 2016; the 2017 period included no first-quarter tax expense from adoption of share-based payment accounting guidance.
Adjusted non-GAAP diluted EPS was $0.26 versus $0.25 for Q3 and $0.73 versus $0.68 for nine months. Adjusted non-GAAP EBITDA was $12.5 million versus $12.1 million for Q3 and $35.9 million versus $34.1 million for nine months. These company-defined measures exclude specified stock compensation, acquisition, restructuring and amortization items and assume a normalized tax rate; they are not GAAP measures. Adjusted gross margin was 40% in Q3 and 39% for nine months, compared with 39% in both prior-year periods.
Balance sheet, liquidity and capital allocation
- At September 29, cash was $16.2 million, compared with $19.7 million at December 30, 2016. Current assets were $74.7 million and current liabilities $44.6 million, implying working capital of $30.1 million.
- Long-term debt was $22.0 million, up from $7.0 million at year-end. The $45.0 million revolving facility had $23.0 million of remaining capacity; its reported interest rate was 2.73%. The company was in compliance with its covenants.
- Nine-month operating cash flow of $19.0 million was offset by $13.9 million of investing outflows and $8.5 million of financing outflows; cash decreased $3.5 million. Investing included acquisition payments and $4.9 million of property and equipment purchases. Financing included $11.3 million of share repurchases, $8.7 million of dividends, and net revolver borrowings of $15.0 million.
- Management believes cash, operating cash generation and available revolver capacity will fund working capital and capital spending for at least the next 12 months, while noting that future financing, if desired, may not be available.
Changes, outlook and material items
- Geographic and service trends: Hackett’s domestic revenue was down 7% in both Q3 and the nine-month period, which management attributed to the shift from on-premise software work toward cloud implementations and softer activity in some practices. International Hackett revenue grew 36% in Q3 and 39% year to date, primarily in Europe. SAP Solutions revenue fell 6% in Q3 but rose 3% year to date.
- Acquisitions: The company acquired Jibe Consulting and U.K.-based Aecus in Q2 to expand Oracle Cloud/EBS, outsourcing advisory and robotic process automation capabilities. Jibe contributed $7.6 million of revenue before reimbursements and $0.7 million of contribution before specified overhead and other items from acquisition through September 29; Aecus contributed $2.6 million and $0.5 million, respectively. Purchase-price allocations were preliminary and could be revised. Jibe consideration includes contingent payments tied to performance targets.
- Subsequent event: After quarter-end, a subsidiary acquired the Chartered Institute of Management Accountants’ share of the Certified GBS Professionals program for $2.0 million cash. Required acquisition disclosures were not yet complete.
- Restructuring and unusual items: The company recorded $1.3 million in Q2 restructuring costs tied to cloud-transition resource changes, the Jibe acquisition and global resource rationalization related to Aecus/RPA work. No restructuring accrual remained at quarter-end. Q3 included acquisition-related compensation and non-cash stock compensation expenses.
- Capital returns: The company repurchased 182,000 shares in Q3 for $2.5 million and had $3.1 million of authorization remaining. The annual dividend had been raised to $0.30 per share; a $0.15 semiannual dividend declared after quarter-end was scheduled for payment in January 2018.
- Guidance and risks: The filing gives no specific revenue or earnings forecast. Management cites project timing or cancellation, client retention and new business, employee recruitment and retention, competition and pricing, acquisition integration, customer collections, foreign currency, economic conditions and access to financing as risks. A 100-basis-point increase in revolver rates was not expected to materially affect results. Management reported no material change in previously disclosed risk factors and stated that disclosure controls were effective.
- Accounting changes: The company planned to adopt the new revenue recognition standard on December 30, 2017 using the cumulative-effect method and did not then anticipate a material financial-statement impact; its assessment and related disclosures were still in progress. Lease accounting guidance was also under assessment.
Most important facts for investors to verify
- Whether domestic cloud-transition weakness improves and international growth continues, including the revenue and margin contribution of the acquired businesses.
- Final acquisition valuations, contingent consideration and the extent to which acquisition-related compensation costs recur.
- Cash conversion and receivables: accounts receivable and unbilled revenue rose to $55.6 million, including $18.6 million of unbilled revenue.
- Debt, revolver availability and covenant headroom as the company continues acquisitions, dividends and share repurchases.
- Actual effects of the new revenue recognition and lease accounting standards, and the timing and size of future tax expense.