Business context and reporting period
The Hackett Group, Inc. (Nasdaq: HCKT) is an intellectual-property-based advisory, benchmarking, business-transformation and enterprise-technology consulting firm. This 10-K covers the fiscal year ended December 30, 2022; the fiscal year ended December 31, 2021 is the principal comparison. The company reported three segments: Global Strategy & Business Transformation (Global S&BT), Oracle Solutions and SAP Solutions.
Financial and operating performance
| Metric | FY2022 | FY2021 |
|---|---|---|
| Total revenue | $293.7 million | $278.8 million |
| Operating income | $55.2 million | $46.5 million |
| Operating margin | 18.8% | 16.7% |
| Net income | $40.8 million | $41.5 million |
| Diluted EPS | $1.28 | $1.26 |
| Operating cash flow | $58.9 million | $46.4 million |
- Revenue before reimbursements rose 4.4% to $289.7 million. Segment revenue: Global S&BT $169.7 million (+16%); Oracle $76.3 million (+2%); SAP $47.8 million (-17%).
- Global S&BT’s Executive Advisory, IPaaS and Market Intelligence offerings grew more than 20%; segment annualized contract value from recurring revenue also grew more than 20%. Global S&BT represented 58% of total revenue.
- Personnel costs were $174.1 million, or 59% of revenue, versus 62% in 2021. SG&A was $61.0 million, 21% of revenue in both years. Segment profit increased for Global S&BT, but declined slightly for Oracle and more substantially for SAP.
- Cash and cash equivalents were $30.3 million at year-end versus $45.8 million. Debt was $60.0 million gross ($59.7 million net of deferred debt costs), versus none in 2021; net debt was approximately $29.4 million. The $100 million revolving facility had about $40 million of remaining capacity. Current assets were $81.2 million and current liabilities $59.6 million.
- Investing cash outflow was $4.7 million, mainly reflecting technology and platform development and equipment. Financing cash outflow was $69.7 million, principally due to share repurchases and dividends, partly offset by $60 million of facility borrowings.
Material changes versus the prior period
- Revenue increased 5%, and operating income increased 19%; net income declined 2% as the effective tax rate rose to 26% from 10%.
- 2021 net income included a $7.7 million tax benefit from exercise of stock appreciation rights (SARs); 2021 revenue and SAP results also included a $5.3 million software sale. These items complicate year-over-year comparisons.
- 2022 cash flow from operations improved by $12.5 million. Cash fell as the company repurchased 4.9 million shares for approximately $116.6 million including transaction costs, paid dividends, and drew on its credit facility.
- In the third quarter, the company reorganized reporting into three segments and recast historical segment information. It said a prior segment-reporting material weakness was fully remediated by year-end; management and the auditor reported effective internal control over financial reporting.
Outlook, risks and unusual items
- Management said cash, operating cash flows and borrowing availability should fund requirements for at least the next 12 months and beyond. It expected 2023 capital expenditures to approximate 2022’s $4.7 million and dividend payments in 2023 to be approximately $12 million. No specific revenue or earnings guidance is provided in the filing.
- Management is investing in recurring, higher-margin IPaaS, advisory and market-intelligence offerings and platforms, including Hackett Connect, launched in early 2023. Growth depends on client demand, partner channels, platform execution and the ability to hire and retain skilled staff.
- Risks include macroeconomic weakness, delayed or cancelled projects, intense competition, customer concentration and short-notice termination rights. The ten largest clients generated 24% of 2022 revenue; the largest contributed 7%. Fixed-price project estimates, collections, foreign exchange, cybersecurity, privacy compliance and variable-rate debt are additional risks.
- The revolving facility matures November 7, 2027, is secured by substantially all assets of the company and certain U.S. subsidiaries, and carries financial covenants. The company reported compliance at year-end; rates are variable.
- Routine legal proceedings were disclosed; management did not expect their disposition to materially affect financial position, cash flows or results. Goodwill was $83.5 million; annual impairment testing found no impairment.
Important facts for investors to verify
- Whether Global S&BT’s recurring-revenue growth continues and offsets softer Oracle activity and the SAP revenue decline.
- How the $60 million borrowing, variable interest rates, facility covenants and remaining borrowing capacity evolve alongside shareholder returns.
- Whether 2022 profitability and cash generation are sustainable after considering the 2021 software sale and unusually favorable 2021 tax benefit.
- Whether customer concentration, project timing and 30-day cancellation provisions affect future revenue visibility and collections.
- Whether management’s expected 2023 capital spending and dividend outlook remains consistent with operating performance and credit-agreement restrictions.