Hackett Group, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 28, 2018. The filing is an annual report, not a standalone Q4 report. Unless otherwise stated, financial amounts are in millions of U.S. dollars.
Business context
Hackett is a strategic consultancy and benchmarking, business transformation, and enterprise technology services firm. Its strategy centers on proprietary benchmarking and best-practice intellectual property, digital transformation tools, cloud ERP/EPM implementation, advisory subscriptions, and partner-led “IP as a service” offerings. The company reported one operating segment and had 1,165 associates at year-end.
Financial performance
| Metric | FY2018 | FY2017 | Change / context |
|---|---|---|---|
| Revenue before reimbursements | $264.5 | $255.1 | Up 4%; core revenue measure |
| Total revenue | $285.9 | $276.6 | Up 3%; includes reimbursed client expenses |
| Operating income | $33.6 | $28.7 | Up 17%; operating margin on revenue before reimbursements was about 12.7%, versus 11.3% |
| Continuing-operations income | $27.4 | $25.6 | Up 7%; diluted EPS was $0.85 versus $0.79 |
| Net income | $23.9 | $27.4 | Down 13%; includes a $3.45 loss from discontinued operations |
| Diluted EPS | $0.74 | $0.85 | 2017 benefited from tax-related items; 2018 included impairment and discontinued-operation charges |
| Operating cash flow | $32.4 | $26.5 | Improved year over year |
| Cash and working capital | $13.8 cash; $28.9 working capital | $17.5 cash; $23.8 working capital | Cash declined; working capital increased |
| Debt | $6.5 | $19.0 | Revolver balance reduced by $12.5 during FY2018 |
Personnel costs before reimbursable expenses were 60% of revenue before reimbursements in both years. Income tax expense was $5.6 million, a 16.9% effective rate on continuing operations, compared with $2.6 million and 9.1% in FY2017. The prior-year rate included significant tax benefits from U.S. tax reform and share-based compensation accounting.
Material changes and unusual items
- International revenue before reimbursements increased 11%; domestic revenue increased 2%. International revenue rose to 18% of total revenue from 16%.
- SAP Solutions revenue declined 16% to $33.6 million, which management attributed primarily to changes in SAP’s channel strategy. The Oracle EEA group was also affected by its transition from on-premise work to cloud implementations.
- FY2018 included a $6.3 million asset impairment, primarily associated with the Hackett Performance Exchange and Working Capital Course. The company said cybersecurity and data-protection requirements made the data-extraction offering difficult to implement; it wrote off a $5.9 million investment in the Exchange.
- The European REL Working Capital group was discontinued. It generated $3.0 million in FY2018 revenue and a $3.45 million after-tax loss; year-end discontinued-operation liabilities were $2.3 million, primarily severance-related.
- A $4.4 million benefit from reducing acquisition contingent consideration partly offset the impairment charge. The filing also reports a $0.5 million acquisition-related compensation benefit.
- Q4 revenue before reimbursements was $61.6 million, operating income was $2.8 million, and net loss was $0.1 million. Q4 included the $6.3 million impairment; discontinued operations recorded a $2.9 million loss that quarter.
Liquidity, capital allocation, and outlook
- Operating cash flow was $32.4 million; investing cash outflow was $9.6 million, including investment in systems, laptops, and Quantum Leap benchmarking technology; financing cash outflow was $26.6 million.
- FY2018 financing uses included $10.0 million of dividends, $12.5 million net repayment of the revolver, and share-related payments and repurchases. The annual dividend increased to $0.34 per share; after year-end, the board raised it to $0.36 per share.
- The revolving credit facility had $45 million of capacity and $6.5 million outstanding at year-end, with maturity in May 2021. Hackett reported compliance with its covenants. Management said cash, borrowing availability, and operating cash flow should fund working capital and capital needs for at least the next 12 months.
- Management provided no numerical revenue or earnings guidance. It plans to continue developing its digital transformation platform and Quantum Leap in 2019, expand cloud and automation capabilities, leverage alliance channels, recruit talent, and pursue strategic acquisitions.
- Adoption of the new lease standard beginning December 29, 2018 was expected to add approximately $9 million of operating lease liabilities and corresponding right-of-use assets, without a significant expected effect on earnings or cash flows.
Key risks and contingencies
- Clients can generally cancel projects on 30 days’ notice; the ten largest clients generated 22% of revenue, although no single client exceeded 5% in FY2018.
- Demand, pricing, project timing and cancellations, consultant utilization, and fixed personnel and rent costs can create quarterly earnings volatility. Fixed-fee engagements also expose the company to cost-estimation and loss risks.
- Competition for skilled professionals, integration of acquisitions, the Oracle and SAP channel transitions, and execution of the shift to cloud and recurring IP-based offerings could affect growth and margins.
- Foreign currency movements, variable-rate debt, collection delays, cybersecurity incidents, and evolving privacy rules—including GDPR—could adversely affect results or operations. Hackett reported no currency hedges.
- Ordinary-course legal proceedings were not expected by management to materially affect financial position, cash flows, or results. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether revenue growth and operating-margin improvement continue after separating the $6.3 million impairment and the contingent-consideration benefit.
- Whether the Q4 earnings decline reflects one-time charges or signals weaker underlying demand, particularly in SAP and Oracle practices.
- Progress in cloud implementation, Quantum Leap, DTP, and partner-led recurring revenue, including the costs and commercial returns on these investments.
- Cash conversion and collections: accounts receivable and unbilled revenue totaled $54.8 million, including $20.5 million of unbilled revenue.
- Future cash uses, including dividends, buybacks, lease obligations, acquisition earnouts, and compliance with credit-facility covenants.
- The final financial-statement impact of lease-standard adoption and the remaining costs associated with the discontinued REL practice.