Business context and reporting period
The Hackett Group, Inc. (NASDAQ: HCKT) filed this Form 10-K for the fiscal year ended December 31, 2021. The company provides benchmarking, advisory, business transformation, and enterprise software implementation services, supported by proprietary intellectual property and its Quantum Leap and Digital Transformation Platform offerings.
Key financial results
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue before reimbursements | $277.6 million | $234.8 million |
| Operating income | $46.5 million | $8.6 million |
| Operating margin, based on revenue before reimbursements | 16.7% | 3.7% |
| Net income | $41.5 million | $5.5 million |
| Diluted EPS | $1.26 | $0.17 |
| Cash from operating activities | $46.4 million | $44.1 million |
| Cash and cash equivalents at year-end | $45.8 million | $49.5 million |
Revenue before reimbursements increased 18%. Strategy and Business Transformation revenue rose 22% to $108.2 million; ERP, EPM and Analytics revenue rose 19% to $145.6 million, including a $5.3 million software transaction; International revenue was essentially flat at $23.7 million. No customer represented more than 5% of revenue, while the ten largest represented 22%.
Personnel costs were 59% of revenue before reimbursements, compared with 66% in FY2020; SG&A was 20%, compared with 22%. The filing does not present a separate gross margin figure. FY2021 cash flow from investing activities was a use of $3.2 million, principally for property, equipment, and Quantum Leap technology. Financing activities used $46.7 million, including dividends and share-related payments.
Liquidity, debt, and capital returns
Hackett ended the year with no borrowings under its $45.0 million revolving credit facility and reported $45.8 million of cash. Management said available cash, operating cash flow, and borrowing capacity should cover anticipated requirements for at least the next 12 months and beyond. The company was in compliance with its credit agreement covenants.
FY2021 dividends totaled $12.9 million, at an annual rate of $0.40 per share. After year-end, the board raised the annual dividend to $0.44 per share; management expected 2022 dividend payments of approximately $14.0 million. The company repurchased 749,000 shares for $13.0 million under its authorization. Total financing cash use for share-related activity also included $21.6 million of employee tax withholding, including settlement of stock appreciation rights.
Changes, outlook, risks, and unusual items
- Recovery and profitability: Management attributed FY2021 growth to improved demand for digital transformation work, higher rates and utilization, and a rebound from COVID-affected FY2020. Operating income improved substantially; FY2020 included $10.5 million of restructuring and asset impairment charges, versus none in FY2021.
- Nonrecurring and tax effects: FY2021 included the $5.3 million software sale and a tax benefit associated with exercising 2.9 million stock appreciation rights. Together, management said these items increased diluted EPS by $0.33. The effective tax rate was 10.4%, compared with 33.7% in FY2020; the lower FY2021 rate was primarily due to the share-based compensation tax benefit.
- Working capital: Net accounts receivable and contract assets increased to $50.6 million from $32.8 million, and the allowance for doubtful accounts rose to $2.7 million from $0.6 million. Management cited increased receivables and contract assets as offsets to operating cash generation.
- Guidance: The filing gives no formal revenue or earnings guidance. It expects 2022 capital expenditures to approximate FY2021’s $3.2 million and dividends of approximately $14.0 million.
- Risks: The company highlights economic and COVID-19 uncertainty, project delays or cancellations, client concentration and termination rights, competition and pricing pressure, hiring and retention, fixed-fee project estimation, cybersecurity and privacy, foreign exchange, acquisition integration, and interest-rate and LIBOR transition exposure. The Russia-Ukraine conflict is also identified as a potential source of economic disruption.
- Other disclosures: Management said ordinary-course legal matters were not expected to materially affect financial position, cash flows, or results. The financial statement audit and internal-control audit received unqualified opinions. Fixed-fee revenue recognition was identified as a critical audit matter because estimates of work completed and remaining engagement costs require judgment.
Important facts for investors to verify
- How much future growth and earnings depend on recurring advisory/IP-as-a-Service revenue versus project work and software resale.
- Whether the FY2021 improvement persists after excluding the $5.3 million software sale and $0.33 per-share combined benefit from the identified unusual items.
- Receivables and contract-asset collection trends, the higher doubtful-account allowance, and related working-capital needs.
- The company’s ability to sustain utilization, pricing, and margins while hiring and retaining skilled professionals.
- Dividend and repurchase capacity under credit-agreement restrictions, particularly given substantial FY2021 cash returns and share-related payments.