Business context and reporting period
The Hackett Group, Inc. filed this Form 10-K for fiscal 2016, ended December 30, 2016. The filing covers the full fiscal year, not only the fourth quarter. Hackett provides strategic advisory, benchmarking, business transformation, working-capital management, and enterprise technology consulting, supported by proprietary benchmarking and best-practice intellectual property.
Financial performance and position
Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted. Revenue before reimbursements is a useful measure of service revenue because reimbursements are offset by equivalent costs.
| Metric | FY 2016 | FY 2015 | Change or context |
|---|---|---|---|
| Total revenue | $288.6 | $260.9 | Up 10.6%; up 11.1% in constant currency |
| Revenue before reimbursements | $259.9 | $234.6 | Up 10.8% |
| Operating income | $34.6 | $21.9 | Operating margin on revenue before reimbursements: 13.3%, versus 9.3% |
| Net income | $21.5 | $13.8 | Net margin on revenue before reimbursements: 8.3%, versus 5.9% |
| Diluted EPS | $0.66 | $0.43 | Up about 53% |
| Adjusted non-GAAP net income | $30.8 | $23.9 | Adjusted diluted EPS: $0.94 versus $0.75 |
| EBITDA / adjusted EBITDA | $38.1 / $46.9 | $26.7 / $37.1 | Non-GAAP measures |
| Cash from operating activities | $32.9 | $36.2 | Lower by $3.3; working-capital growth, including receivables and unbilled revenue, weighed on cash generation |
| Capital expenditures | $3.2 | $3.0 | Primarily benchmark technology development and equipment |
| Cash and working capital at year-end | $19.7 / $13.0 | $23.5 / $17.4 | Cash and working capital both declined |
| Long-term debt at year-end | $7.0 | $0 | $45 million revolving facility; $7 million drawn at year-end |
FY 2016 operating cash flow less capital expenditures was approximately $29.7 million. The company reported a 36.9% effective tax rate, compared with 35.8% in FY 2015. At year-end, total current assets were $68.8 million and current liabilities were $55.8 million.
For the fourth quarter, revenue was $62.9 million, operating income $9.7 million, and net income $6.2 million; diluted EPS was $0.19. Revenue was below the third quarter’s $66.8 million, while operating income and net income were higher.
Material changes versus the prior comparable period
- North American revenue grew more than 13%; European revenue declined 2.9% reported but was flat in constant currency. International revenue was 14% of total revenue, down from 16%.
- Management attributed growth to strong U.S. demand and better collaboration and cross-selling among consolidated practices. Revenue from the top 20 U.S. clients grew just over 20%.
- Personnel costs before reimbursements rose 11% to $157.5 million, mainly due to increased headcount and subcontractor costs. SG&A excluding specified non-cash, amortization, and other items declined 1%; SG&A leverage improved with revenue growth.
- FY 2015 results included $2.7 million of non-recurring, non-cash compensation expense related to performance-based stock appreciation rights. Management cited this as one factor affecting the year-over-year GAAP earnings comparison.
- Financing cash outflow increased to $33.5 million, primarily reflecting $30.1 million of share repurchases, $4.0 million of employee tax withholding payments, and $7.2 million of dividends, partly offset by net borrowings.
Outlook, risks, contingencies, and unusual items
- Management expected U.S. growth to be tempered near term as clients assess the shift from on-premise to cloud software; it anticipated favorable European growth prospects for 2017. No numerical earnings or revenue guidance was provided.
- Hackett expected to launch its Quantum Leap benchmarking offering in the first half of 2017, integrating Hackett Performance Exchange technology. Management also cited potential growth from advisory memberships, partner programs, and professional training and certification.
- Key risks include short sales cycles and project timing uncertainty, customer cancellation rights generally on 30 days’ notice, client concentration, competition and pricing pressure, recruiting and retention of skilled staff, project estimation and fixed-fee contract losses, and foreign-currency movements. The ten largest clients generated 24% of FY 2016 revenue; no single customer exceeded 5%.
- The company had $47.4 million of net accounts receivable and unbilled revenue, including a $2.6 million doubtful-account allowance. Collections and project execution are important to cash flow and margins.
- The revolving credit facility was amended in May 2016 to provide $45 million of capacity and mature in May 2021. Hackett reported covenant compliance at year-end; it borrowed an additional $8 million after year-end. Debt bears variable interest, and the company reported no material 2016 earnings sensitivity to a 100-basis-point increase.
- FY 2016 included $8.8 million of stock-based compensation expense. Goodwill was $72.4 million and was not impaired in the annual test. The company reported ordinary-course legal matters that management did not expect to materially affect financial position, cash flows, or results.
- After year-end, the board increased the annual dividend from $0.26 to $0.30 per share. Amendments to CEO and COO employment agreements revised change-of-control and separation benefits, including double-trigger vesting and compensation provisions.
- Management and the auditor concluded that internal control over financial reporting was effective at year-end; the auditor issued unqualified opinions on the financial statements and internal controls. The filing also describes a prior material weakness related to the 2014 Technolab acquisition accounting; it does not report a current-year material weakness.
Important facts for investors to verify
- Whether U.S. demand, European performance, and the cloud-transition outlook developed as management anticipated, and whether new IP-based offerings generated recurring revenue.
- Receivables, unbilled revenue, collection trends, and the adequacy of the doubtful-account allowance, given operating cash flow declined despite higher earnings.
- Share repurchases, dilution from equity awards, and the cash and credit-facility capacity available after the subsequent borrowing and repurchase activity.
- The sustainability of reported earnings growth after considering stock compensation and other adjustments used in the company’s non-GAAP measures.
- The outcome of the IRS examination of the company’s fiscal 2014 U.S. income tax return, begun in the first quarter of 2017, and any related tax exposure.