Business context and reporting period
The Hackett Group, Inc. (NASDAQ: HCKT) is a global advisory and technology consulting firm focused on benchmarking, business transformation, working-capital improvement, and enterprise software services. This Form 10-K covers fiscal 2014, ended January 2, 2015; the fiscal year included 53 weeks. Comparisons are with fiscal 2013, ended December 27, 2013.
Financial results and liquidity
Amounts below are in millions except per-share data. Total revenue includes reimbursed client expenses; revenue before reimbursements is a useful view of underlying service revenue.
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue before reimbursements | $213.5 | $200.4 | +6.5% |
| Total revenue | $236.7 | $223.8 | +5.8% |
| Operating income | $12.6 | $15.7 | -20.0% |
| Net income | $9.7 | $8.7 | +11.2% |
| Diluted EPS | $0.33 | $0.27 | +22.2% |
| Cash from operations | $16.0 | $24.3 | -34.0% |
- GAAP operating margin was approximately 5.9% of revenue before reimbursements, versus 7.8% in 2013. Adjusted non-GAAP gross margin improved to 38% from 37%; adjusted non-GAAP net income was $16.9 million, or $0.56 diluted EPS, compared with $13.3 million, or $0.41.
- Cash and cash equivalents were $14.6 million, down from $18.2 million. Working capital was $18.2 million, versus $25.9 million.
- Long-term debt was $18.3 million, down from $19.0 million; the $20 million revolving facility had no balance drawn. The term loan carried a 1.92% rate at year-end and matures in 2018.
- Operating cash flow declined, which management attributed mainly to higher receivables and unbilled revenue, an additional payroll cycle in the 53-week year, and higher incentive-compensation payments. Investing used $5.1 million, including acquisition spending and higher equipment purchases; financing used $14.5 million, including $11.0 million of repurchases, $3.5 million of dividends, and debt paydown.
- Management said cash, expected operating cash flows, and available borrowing capacity were sufficient for working capital and capital spending needs for at least the next 12 months. Contractual obligations included $18.3 million of debt principal and $8.0 million of operating leases.
Material changes versus the prior period
- Technolab’s EPM application-maintenance business, acquired in early 2014, contributed $10.3 million of revenue and $3.3 million of contribution before depreciation, amortization, interest, corporate overhead allocation, and taxes.
- North American revenue increased approximately 4% excluding the acquisition; international revenue declined 9%. International revenue represented 19% of total revenue, compared with 20% in 2013. Management described Western European demand and decision-making as volatile.
- Personnel costs rose 4% overall, largely due to the acquisition; excluding it, personnel costs decreased slightly. SG&A increased 11%, to $56.2 million, and rose to 26% of revenue before reimbursements from 25%.
- GAAP results included $3.6 million of restructuring costs, primarily related to staff reductions and office leases in Europe, and a $3.0 million Technolab bargain-purchase gain. The acquisition’s purchase consideration was subsequently reclassified in part as compensation expense: $4.3 million was recognized in 2014, with further compensation expense expected over vesting periods.
- Income tax expense was $2.3 million, versus $6.4 million; the reported effective rate was 18.8%, or 30.7% excluding the one-time acquisition accounting benefit. The prior-year effective rate was 42.3%.
Outlook, commentary, and risks
Management expected U.S. market conditions to remain healthy in 2015 and international activity, primarily Western Europe, to be stable to improving, while remaining cautious about European demand and noting continued volatility. It cited expected U.S. GDP growth of 2%–3% and regional European growth above 1%. The filing provides no company-specific revenue or earnings guidance.
- Strategy emphasizes extending Hackett’s proprietary benchmarking and best-practice intellectual property into transformation services, advisory programs, new performance tools, external channels, and strategic partnerships; management also cited talent development, offshore delivery, and selective acquisitions.
- Key risks include economic weakness or delayed/cancelled client projects, competition and pricing pressure, reliance on skilled personnel, estimating fixed-fee engagements, currency movements, and client concentration. The ten largest clients generated 21% of 2014 revenue; contracts generally may be cancelled for convenience with 30 days’ notice.
- The company reported ordinary-course legal matters and said their resolution was not expected to materially affect financial position, cash flows, or results. It reported no off-balance-sheet arrangements.
- Auditors issued an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting, identifying a material weakness in controls over business-combination accounting. Management concluded its controls were effective and disagreed that the deficiency was a material weakness. The issue related to Technolab accounting adjustments; management said the adjustments did not materially affect year-end GAAP results and said it would consider third-party support for future acquisitions.
Important facts for investors to verify
- Reconcile the Technolab purchase-price, compensation-expense, bargain-gain, and tax adjustments, including the subsequent adjustment disclosed in Item 9B and any remaining vesting-related expense.
- Review remediation of the auditor-identified material weakness and any changes in acquisition-accounting controls.
- Track collections, unbilled revenue, operating cash flow, and working-capital trends following the 2014 cash-flow decline.
- Assess whether international demand stabilizes and whether North American growth can offset European weakness.
- Confirm debt covenant compliance, dividend capacity under the credit agreement, and the sustainability of repurchases and the increased dividend.
- Evaluate reported GAAP performance separately from adjusted non-GAAP results and the acquisition-related items that affected both comparability and margins.